Kingfisher case shows why India needs strong debt recovery laws

The Calcutta High Court's judgement on Kingfisher's wilful defaulter tag highlights the difficulties faced by banks in recovering unpaid loans

All it took was an extra committee member to dent United Bank of India's (UBI) efforts to recover unpaid dues from Kingfisher Airlines.

The state-run lender has been meticulously building its case against the grounded airline for more than two years now. UBI was the first (and still the only) bank to declare Kingfisher, its chairman Vijay Mallya, and three other directors as wilful defaulters, a tag that effectively prevents them from getting access to institutional finance in future.

Last week, however, the Calcutta High Court dismissed UBI's action against Kingfisher. The court observed that UBI's identification committee on wilful defaulters was comprised of four members, which was one more than prescribed in regulation 3(i) of the Reserve Bank of India's (RBI) master circular on wilful defaulters. 

"In such circumstances the decision arrived at by such identification committee is a nullity. Consequently, all steps taken by United Bank of India subsequent to such so-called identification are also a nullity," Justice Debangsu Basak said in his judgement on December 24, 2014.

UBI is perhaps at fault for deviating slightly from the prescribed regulation, but many felt that the bank actually took more care in declaring Kingfisher a wilful defaulter by having an extra member in its wilful defaulter committees. It is also argued that RBI's master circular on wilful defaulter does not use the word "only" while specifying the number of committee members.

While UBI is allowed to reinitiate the process of identification and declaration of Kingfisher a wilful defaulter, there is no doubt that there will be further delays in recovering the dues. Sometimes, if not always, justice delayed is justice denied.

This case is certainly not a stray incident. There have been instances in the past when errant borrowers have successfully stonewalled lenders' legitimate recovery efforts.

A performance review of debt recovery tribunals (created to help lenders recover dues speedily without being subject to the lengthy procedures of usual civil courts) offers insight to the current state of affairs. 

The amount recovered from cases decided in 2013-14 under debt recovery tribunals was only 13% of the amount at stake. While the law indicates that cases before debt recovery tribunals must be disposed of in six months, only about a fourth of the cases pending at the beginning of the year were cleared during the year.

However, not everyone blames the judicial system for coming in the way of banks in recovering what they have lent. Experts suggest that legislation needs to be amended to empower banks and the regulator and laws must be introduced to reduce the incidence of contesting every move of lenders in the court.

Till that happens a large chunk of bank loans may continue to remain unpaid.

(Somasroy Chakraborty writes on banking and finance for Business Standard)