Finding an Appropriate Exit: Financial Express: 2nd June 2009

The saga of the financial crisis continues to spill over into the manufacturing sector with GM now filing for bankruptcy under Chapter 11. The question is, what are the lessons for us in India?
Bankruptcy laws in India remain weak. Within the set of Asian nations, it was found that India, along with Indonesia, has the lowest rates of recovery and also takes the longest time for settlement. For example, in countries like Australia, Japan, Hong Kong and Singapore, such cases are sorted out within a year while the recovery rate is as high as 80-90%. In contrast, in India, the recovery rate is just 10% while it takes an average seven years for a settlement with some cases stretching beyond ten years.
The main problem relating to bankruptcy is recognition. There is quite a stigma attached to bankruptcy and companies are not willing to accept the same. Further, once recognised, companies are not willing to have a change in management unless it is absolutely essential. Also, the rehabilitation packages invariably involve reduction of costs, which includes labour, where the laws are rigid.
The banking system is most affected by rising potential delinquencies due to the large amounts of capital that are held up on this score, with NPAs being a manifestation of this phenomenon. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers banks to recover their non-performing assets without the intervention of the court and this is done through securitisation, asset reconstruction companies and enforcement of security. However, there are issues here relating to the smaller units being targeted by banks. The Act views all defaulters alike without any distinction as between a wilful defaulter and a defaulter by circumstances beyond his control.
There is really a dilemma here as debtors tend to delay and prolong the process of reconciliation. Often debt is enhanced further in the name of reviving the unit or attempts are made at ever-greening. Further, political pressure could be applied to ensure that the enterprise continues operations without any interference.
Clearly, there is need to strengthen this process through better monitoring and redress. Firstly, banks need to strengthen their appraisal processes to ensure that more due diligence is done at the time of loan delivery. Secondly, it is essential to draw up early warning signals through regular follow up with the clients and have systems in place. Declining profits,...