Analysis: Naming and shaming of defaulters should be left to markets

Analysis: Naming and shaming of defaulters should be left to markets

While the Supreme Court has all along been batting for naming and shaming of such smug borrowers, the RBI curiously has been cocooning them on the grounds of the fiduciary relationship that marks the bank-borrower relationship

S MurlidharanUpdated: Thursday, January 04, 2024, 10:44 PM IST
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Reserve Bank of India | File/ Representative

The government and the Reserve Bank of India seem to be happy that there has been no uptick in non-performing assets (NPAs) of banks, thanks to the end of the culture of what Prime Minister Narendra Modi picturesquely describes as “phone banking” in an obvious reference to how the fugitive Vijay Mallya used to get the government to throw good money after bad for his now-grounded Kingfisher Airlines. While that may be a cause for mild cheer, the fact remains that many of the old loans may default, especially given the fact that the government and banks have overcome the problem of NPAs to a degree through ‘cleaning up of balance sheets’ of banks through repeated recapitalisations after write offs of the disagreeable and eyesore bad debts. Evergreening, a euphemism for the defaulter paying back the outstanding only to be granted fresh loans, too is rampant.

The RBI is also worried by the substantial uptick in unsecured loans through the promotion of credit card culture which gets banks close to 42% per annum interest on outstandings beyond the minimum dues. Come to think of it, bad debts or NPA is an inherent risk to lenders. It is therefore good that the market regulator Securities and Exchange Board of India (SEBI) wants bonds to replace a substantial part of loaned funds of corporates. Its consultative paper in this regard among other things wants to lower the ticket size of each bond to Rs 10,000 from the extant Rs 1,00,000. As it is, private placement of bonds targeting large investors is the norm.

Time was when the redoubtable Dhirubhai Ambani would routinely float bonds of his flagship company Reliance Industries Ltd in the market. He pioneered in India the concept of convertible debentures that contained a sweetener — convert the whole or part of the debentures into shares within a given time if you want. That allowed the subscribers to watch the performance of the company’s equity before exercising their choice one way or the other. It is another matter RIL took liberties with the system and went to the extent of converting even non-convertible debentures (NCD) on the back of the solid performance.

SEBI should do everything in its power to make the almost extinct convertible debentures stage a comeback. Indeed, CDs should presage and herald the revival of NCDs. CDs are what enabled RIL to build the equity cult in India. It would incidentally stop loss-making companies from making IPOs thus making the retail investors an unwitting venture capitalist. A modicum of profits and reasonably good financials are prerequisites to floating CDs successfully. Be that as it may.

Coming to weaning away of bank-dependency for loans, publicly traded bonds issued by big corporates is what the doctor has ordered. Indian promoters are quick to make IPOs but loath to float bonds for their capital requirements. Instead, they seek the comfort of PSB working capital and project financing secure in the knowledge that non-servicing of such loans would at best be the favorite topic of talking heads in newspapers and television channels. While the Supreme Court has all along been batting for naming and shaming of such smug borrowers, the RBI curiously has been cocooning them on the grounds of the fiduciary relationship that marks the bank-borrower relationship.

It is time they were told enough is enough. Listed companies must be mandated to float bonds in the market instead of straining the fragile capital of our banks who must cater more to the MSME sector and retail loans which are more promising and disciplined vis-à-vis large industrial loans. Market is a martinet of a disciplinarian. While the RBI may indulge the defaulters by citing the fiduciary relationship coming in the way of airing publicly the defaults, willful or others, made by defaulters, the market is unsparing. At the first hint of default, it brings the bond prices a peg or two down before according it the humiliating junk status.

The hitherto cosseted corporates would feel the heat of market traded bonds straightaway. They will have to pay a higher interest if warranted by their financials and track record. In other words, they have to shape up or ship out. The trustees for the debenture or bond holders would call in the receiver if the defaults become routine and unbearable, unlike banks which show monumental patience while dealing with big ticket borrowers even while cracking the whip on retail borrowers.

Investors would have one more avenue in the market. Bonds have an inverse relationship with the prevailing interest rate. If the coupon price on bonds is higher than the prevailing interest rate, investors would plump for them and vice-versa. It is therefore wrong to view bonds as staid or static instruments. They can be dynamic enough to attract the attention of intrepid investors including mutual funds.

Therefore, bonds are a win-win all round. Banks can cater to those other than the well-heeled, markets will become broader and deeper without being obsessed with equity and equity-related instruments and regulators not having to wring their hands in helplessness when loans go sour. Foreign Portfolio Investors (FPI) too would be weaned away more fully from equity. As it is, they chasing a few blue-chip equities creates an artificial boom in the market not warranted by the micro and macro fundamentals. Of course, the more conservative middle class will still set store by the invincibility of the government-guaranteed post office savings scheme.

S Murlidharan is a freelance columnist and writes on economics, business, legal and taxation issues

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