To name and shame defaulters

In its bid to deal with rising levels of non-performing assets in the banking sector, a parliamentary committee has suggested that the government should name all the defaulters whose loans have been written off by state-owned banks. “Members (of the committee) suggested that there is a need for bringing more transparency in the system and a list of all the defaulters whose loans have been written off by the PSBs (public sector banks) is made public. They asked for exemplary action against the wilful defaulters so that others do not indulge in similar activities,” said a statement released by the Finance Ministry. There has been much debate on whether banks should declare the names of defaulters in public. The argument often posed by those who want the banks to go public with the names is that it will ensure greater transparency. Suffice to say, the Indian banking sector is in dire need of fixing. Gross NPAs of state-run banks rose about Rs 1.3 trillion the December quarter to Rs 4.38 trillion. Reports indicate that a number of bad loans will rise further in the following quarter, following the asset quality review carried out by the by the Reserve Bank of India, which has asked banks to come clean on their balance sheets. The central bank has set a March 2017 deadline for cleaning up bad loans in the banking system. Last month, the RBI submitted a list of defaulters owing Rs 500 crore or more to public sector banks under directions from the apex court.

However, in its submission to the court, the central banks said it was “extremely necessary” to keep these names confidential due to their “fiduciary relationship”. “Disclosing personal information which is fiduciary in nature with regard to banks by a statutory body (RBI) would defeat the very purpose of having fiduciary responsibility on the part of banks,” the RBI said. “For these reasons, it is extremely necessary to keep the confidentiality of the information provided along with this affidavit.” But it is imperative to note what the apex court said: “RBI is supposed to uphold public interest and not the interest of individual banks. RBI is clearly not in any fiduciary relationship with any bank. RBI has no legal duty to maximize the benefit of any public sector or private sector bank, and thus there is no relationship of ‘trust’ between them. RBI has a statutory duty to uphold the interest of the public at large, the depositors, the country’s economy and the banking sector. Thus, RBI ought to act with transparency and not hide information that might embarrass individual banks.” In its response, the central bank has accepted the argument that sharing the details of defaulter with other banks could help them address the irresponsible behavior of large corporate borrowers. But by declaring such names in the public domain, the RBI contended that it could discourage investment by viable and well-intentioned promoters and legitimate risk-taking.

“Disclosing details of accounts where defaults have been found irrespective of the reasons, therefore, may have an adverse impact on business and in a way may accentuate the failure of business rather than nursing it back to health,” argued the RBI. The reasons for default could boil down to factors beyond the control of borrowers. But it’s a question of accountability or the lack thereof shown by large corporate borrowers that have compromised India’s financial system and raised the cost of acquiring credit. By using their political connections and working the overburdened judicial system, these massive corporate entities continue to default on their loans, without paying the price for it. Deposing before a Parliamentary committee, RBI Governor Rajan said that the banks had failed to fully predict the profitability and viability of infrastructure projects before providing them loans. In other words, these banks did not bother to perform due diligence due to pressure from their political masters and other stakeholders.

But will naming and shaming them work? Critics have argued that such methods may work for loans given to individuals or smaller establishments. But it may not work for high-profile corporate borrowers because many of them are too shameless to care. Even after he was declared a wilful defaulter, liquor baron Vijay Mallya continued to flaunt his wealth. To the uninitiated, a wilful defaulter is one who has the ability to pay up but does not pay. In any case, the names of willful defaulters are in the public domain because the banks have filed suits against them. In a recent column for Mint, Tamal Bandyopadhyay, a leading expert on the Indian banking sector, said that the solution to the problem of bad loans lies in fixing the legal system. “The debt recovery tribunal is a fast-track route to dispose of such cases but the borrower can appeal against a tribunal judgement in a high court and even Supreme Court. Thousands of such cases have dragged on for years because of an extremely slow legal process. Strengthening the legal system will lead to quicker bad loan recovery and help nurse the banking system to health. Tarring all defaulters and bankers with the same brush will choke the flow of funds to the business, scare the bankers and kill entrepreneurship,” he said.