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Postman only rings once for nation's corporate defaulters

The postman's knock could mean a message from hell for top corporate defaulters in India. Pushed to the wall, state-owned banks are finally telling defaulters: repay your old loans or be taken over.

A new law authorises India's 27 public sector banks to send notices to corporate borrowers demanding repayment of their loans in three months as part of efforts to excise the bad debt spreading throughout the financial system. Those who refuse to pay face having their companies taken over and their assets seized.

Experts have been predicting for years that the Indian financial system could collapse under the weight of non-performing assets of about US$16.7 billion, according to official figures.

However, Ernst & Young says the real figure is much higher, about US$23 billion to US$28 billion, due to India's lax accounting norms and the tendency of banks to extend already overdue loans. These non-performing assets represent about 20 per cent of the assets of the country's top financial institutions.

It takes a lot to stir the phlegmatic Indian government but as bad debts began pushing some banks towards bankruptcy, it finally panicked. The government had little choice. Since state-owned banks account for up to 80 per cent of all loans and advances, if their health deteriorates, so does the health of the entire banking system.

There was no surprise when, in a survey this year of the top 10 performing banks, only one state bank was on the list.

The new no-nonsense mood was evident in Finance Minister Jaswant Singh's comments in parliament last week when he called non-performing assets 'loot, not debt'.

Once they received approval, banks swung into action. ICICI Bank has sent notices to 22 companies. To add to the humiliation, the Indian Express newspaper named some of the culprits (including a few household names) who have not been making interest payments on their loans.

The Industrial Development Bank of India intends to act soon too, spurred by the fact that it had to make a provision of 54 per cent of non-performing assets this year against 27 per cent last year.

Until now, a much-abused loophole has left state-owned banks unable to act against wilful and chronic defaulters. Companies unwilling to repay their loans used to declare themselves 'sick' and registered with the Board for Industrial and Financial Construction. Coming under the shelter of the board gave them automatic protection.

Corporate defaulters have also enjoyed the refuge of India's hopelessly clogged legal system. With an estimated 20 million cases pending in the courts, it can take decades for a case to come to trial, never mind the verdict. Companies sit back, knowing the law will not be taking its course.

Now banks can sell seized assets without a protracted legal battle. More importantly, it leaves no time for asset-stripping as the notice can be issued immediately after a bank classifies the assets as a 'non-performing loan'. Once the notice has been received, the company cannot sell, lease or transfer the assets without the lender's consent.

No wonder a wave of euphoria swept through the banking industry when the measures came into force earlier this month.

'We've already had some defaulters coming to the negotiating table,' said a cheerful bank official.

The law was stoutly opposed by India's two main industry organisations - the Federation of Indian Chambers of Commerce and Industry and the Confederation of Indian Industry - who argued for a more lenient approach but the government refused to relent.

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