Narrative on bank NPAs too loud on promoters; Concept of limited liability not understood

With almost 17 per cent of advances by the public sector banks coming under the toxic category of “stressed” assets, the banks and the government have not yet figured out how to handle such a huge crisis. The only person with a  clarity on the issue , that is RBI Governor Raghuram Rajan, has announced his decision not to seek second term, following a smear campaign against him by BJP leader Subramanian Swamy , supported by some powerful politicians and businessmen, who felt uneasy at the way Rajan was doggedly pursuing the clean-up operation of the state –owned banks.

It is not that people in the government and the banks do not know what can be done about the problem of Non-Peforming Assets which run into several lakhs of crores of rupees. The only solution lies in identifying the willful defaulters and those who found themselves in such a situation following turn of economic events after getting into the trap of exuberance of 2007-08 when corporates with low or no debts on their books were considered too conservative to grow. But the problem is,  who will bell the cat ? Nobody wants to take personal risks for the larger good of the society and the economy.

Under the given circumstances, the solution lies in what people call : cutting the losses or taking hair cuts by the banks. Put simply, banks must settle at waving some part of the loans and the interest even though bad assets are sought to be revived. The question is: Who will decide about these hair cuts and taking losses. What is the guarantee that five years from now, these people are not probed by CBI or any other wing of the enforcement machinery , if there is change of the government.  

Though the Bankruptcy law has come into force, its implementation would take at least a couple of years. Besides, even though the law is clear about the concept of  “limited liability or promters in a corporate entity” , the public discourse on the loud media , especially of television, sees promoter and the corporate as a single entity. The basic idea behind the corporate structure of ownership is that the promoters’ liability is limited to his investment in the entity. If the corporate promoted by him sinks, he loses his investment. Unless there is a malfeasance on his part, you cannot hang him for a company going bust because of his misconceived business ideas and errors in judgements.

That is the real challenge in restoring the banks and corporates under debt stress to health.