BAD DEBTS AND BANKRUPTCY CODE

It is common that whomever we approach, their immediate concern is about Debt Crisis, and may it be an Individual, an organization or any lending institution.  Indian Banks are not an exception to this.  The main concern in the minds of Indian Banks is the Non Performing Debts more so; the amount locked up with Private owners of Infrastructure Projects.  The Banks’ balance sheet is dominating the Bad Loans portfolio, and the growth of Loan portfolio has considerably decreased, due to the loans extended to various Infrastructures which are locked up.

In our country, a clear, simple and easily manageable Bankruptcy Code is the need of the hour which should be backed with a transparent and clear debt market, which can extend credit assistance.  Controlling the Debts through augmentation of Capital has now become possible with a Government move to increase the Capital Base of Public Sector Banks.   Though Bankruptcy bill stands introduced in the Lok Sabha, much is still needed to be done on the Debt market.  There are different ways in which a Bad Debt can be dealt with:

1. Close the bad loan by writing it off. This will of-course clear the balance sheet, but equally the reputation of both Creditors and the Debtors too.   To a limited extent, writing off loans is considered to be healthy and a welcoming feature.
2. When debts turn out to be bad, enforcing strict discipline is possible, thus curbing the release of further facilities. This is not a wise idea. It is always wiser to encourage a debtor and help out during his difficult periods to come out of the situation rather than making him die altogether, which would only displease both the parties.  Instead of bringing down the debt-to-GDP ratio through repayment of the loan, it is always better to increase the GDP, and increase the ratio, which is considered to be a more healthy feature.
3. The Debt-to-GDP ratio may go high, but may not be the only solution for a bad economy. A classic example would be when we find the export revenues are not sufficient enough to off-set the outflows for imports and servicing of debt, whether a country should opt for an autonomous debt or not depends on the differential between the interest income earned and the interest expenses paid by that country which of-course again depends on its hedging against a currency risk.
4. How does a Bankruptcy code designed in India, work. It adds on to say that the borrowers shall be ranked according to their seniority meaning that the creditors at the junior level will never be paid back their dues.  Also, attachment of collaterals and securities should be permitted by the Bankruptcy Courts, instead of the normal courts and legal bodies, who resort to very old methods to resolve the issues. 
5. Government debts traded would pave way for more credit availability through various other sources, than only the banks, which is a welcoming thing. This however, depends on the growth of domestic commercial debt market. 
6. Keeping in mind that India’s deficit is pegged at 3.8 per cent, which is within the allowable limit, the apprehension that an upper limit on the fiscal deficit will result in an unsustainable debt portfolio can be kept aside. By trading in Government debts as proposed now, the borrowing cost should definitely come down.
7. The slow growth in the other Asian countries including China, and other European countries, the GDP growth in India, should be considered far below the alarming inflationary level. Further, the bank credit can be increased through a decrease in the SLR from 21.5 per cent, which will lead to increase in the economy’s growth level.
8. Also, it is indeed a welcoming feature that the Government is proposing to quicken the process of clearance of Infrastructure projects. This would be a better deal rather than waiting for a reduction in the Bad Debts, through the process of clearance of the Banks’ Balance Sheets.

Note: This is purely the Author’s view, and has nothing to do with the policies and guidelines framed by the Government or RBI.