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Was Indian one-time settlement of debts an eye wash?
A. V. Bagur

          WITH liberalisation, globalisation and de-reservation of industries reserved for the units in the small scale sector, followed by entry of multinational corporations (MNCs) with foreign direct investments, venture capitals and external commercial borrowings and such other behemoths with deep pockets of various kinds, a death knell of industrial units in the small and medium enterprise (SME) sector was, but just a corollary. Nevertheless, since these developments were planned and deliberate policy initiatives of the Government of India, it was necessary that a decent exit policy should also have been planned and implemented in respect of the units in the SME sector.
This was not done. The units in the SME sector became sick. Their bank accounts were treated as "NPA" and many of them were declared as 'willful defaulters'. The owners of these units, whose contribution to the national exchequer had helped India come thus far since independence, suddenly became pariah. They were insulted and humiliated by the bankers and in some cases goons and hoodlums were let loose on them to recover whatever can be got out by the use of force or threat. The lucky ones are being hauled before the Debts Recovery Tribunals (DCIs) and some others are being proceeded against under the SRFAESI Act.
Somewhere along the line the Reserve Bank of India (RBI) too realised that units in the SME sector needed a decent burial and thus announced a 'One Time Settlement" (OTS) Scheme. However, the well intentioned OTS Scheme announced by the RBI appears to have fallen flat with multifarious and sometimes hilarious interpretations being adopted by the banks, on one hand, and dilatory tactics being adopted by the some officials at the lower levels. Thus a circular whose object was to give relief to such borrowers who had defaulted due to circumstantial reasons will see the end of the day shortly without seeing the daylight.
The RBI had issued a circular dated September 03, 2005 for a One Time Settlement Scheme in respect of small medium enterprises whose dues did not exceed Rs.100 million (10 crores) and the accounts had been classified as 'non performing assets' as on March 31, 2004. The OTS scheme has classified accounts into two categories.
In respect of first category, the circular says that in respect of an account which had been classified as 'doubtful' as on March 31, 2004 the banks should collect a minimum amount as it stood in the account on the day the account was classified as NPA. In other words, the banks can write off any amount over and above the amount that stood in the account on the day the account was declared as NPA. For example, say an account was declared as NPA on February 1, 2002, and by March 31, 2004 it was categorised as 'doubtful'. If the balance due in the account was, say Rs. (-) 100/- on February 02, 2002, and by March 31, 2004 the due became, say Rs. 175/- then, under the OTS scheme the banks should recover at least Rs. 100/- from the borrower. Rest the bank can write off.
In respect of second category of accounts which were classified as sub-standard as on March 31, 2004, but which have subsequently been classified as doubtful or loss, the minimum amount that the banks have been asked to recover is the amount as it stood in the account on the day it was classified as NPA, plus interest at the existing prime lending rate from April 1, 2004 until the date of final payment. The banks can write off rest of the amount.
The circular says that the OTS guidelines are applicable to cases on which the banks have initiated action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002 and also cases pending before Courts/DRTs/BIFR. However, in respect of cases which are already before DRT/Courts/BIFR the bank as well as the borrower will have to move an application for a compromise decree. The OTS scheme is not applicable to willful defaulters.
The circular sounds quite egalitarian and fair. But when it comes to its implementation, it appears to have fallen flat.
The first thing is that most borrowers (and even bankers) are not fully aware what a 'willful defaulter' means, though in another circular the RBI has laid down detailed procedure for declaring a borrower as a willful defaulter. Unless the procedure has been followed, a borrower cannot be declared as a willful defaulter. But rarely a borrower knows that he is not a willful defaulter as per instructions issued by the RBI. Many borrowers have been turned back on the ground that they have been classified as 'willful defaulters' and are not eligible for benefit of the OTS scheme.
The classification of borrower as 'SME' is another contentious issue. While the bank branch had categorised and treated the borrower as an SME unit all along, but when it comes to extension of the OTS Scheme, the terminology of SME takes another turn. A large number of borrowers are told that they are not SME within the meaning of the circular and are not eligible for benefit of the OTS Scheme.
Banks in the private sector and cooperative sector claim that they are not required to follow the RBI guidelines or the circular is not meant for them. This is when there is Supreme Court judgment in the case of Deva Gowda V./s Corporation Bank (1994 (5)SCC 213 :: 1994 AIR SCW 2721) holding that the circulars issued by the RBI have statutory flavour. Some Writ has also been filed seeking directions for extension of the circulars to other banks.
Many borrowers have been turned back on the ground that their accounts are were classified as NPA or "Loss Account". The procedure for classifying an account as "NPA", "Loss" or "Doubtful" is not known to many borrowers. Neither is the practice a transparent one in most banks. A large number of borrowers found their prayers for an OTS settlement entangled behind these banking jargons.
In some cases borrowers have been asked to deposit 25% of the amount of settlement proposed under the scheme for consideration of their OTS proposal. In some other cases, the banks are reported to have collected the 25% of upfront money, and started haggling for increasing the amount of settlement. On refusal, the OTS submissions have been used for filing cases against the borrowers before the courts as clear case of acknowledgement of liability and sought interim order on its basis.
While official statistical data on how the OTS scheme has fared is not yet available, but when it does come out, it, as it eventually will any way, will be interesting data for analysts to find out how the OTS scheme fared when it came to its implementation. Whether the OTS circular was a poorly drafted document or was it deliberately designed to be implemented the way it was implement, only time will tell. But one thing is clear; the OTS circular could have given a one time chance to change the debt scenario of the nation and reduced the massive number of cases pending before the tribunals.
The writer is involved in researching matters connected with the management of stressed assets of banks and financial institutions


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