Insights into Editorial: The case for mediated settlements
The Indian Public Banking System has been grappling with the problems of bad loans and is unable to find more than a band aid solution for it. Hence, the Reserve Bank of India has made it very clear to the banks that the system has to not only provide cushioning but also clean up the balance sheet. To formalize this dictum in the form of a possible regulatory move, the proposition of “bad banks” was made in the Economic Survey of India 2017-2018.
- Limiting aspect of direct negotiations between bank and debtor, which usually run on the lines of high demands by banks and low offers by the debtor. The smaller borrower especially is faced with an imbalance in negotiating strength and is thus denied feasible, even if unattractive, settlement terms. Larger borrowers in acute distress may face similar problems. Settlement terms can be onerous which, if breached, have consequences of closure of business and sale of property.
- Another challenge is the fear of post-decisional retributive action by way of investigation and prosecution by multiple agencies such as the police, the Central Bureau of Investigation (CBI), the Central Vigilance Commission (CVC), the Lokpal, etc. Once initiated, the spectre of lengthy criminal trials looms, accompanied by fear of arrest, denial of bail and public ignominy. Courts respond inadequately — they do not speed up trials or consider bail applications expeditiously or penalise unnecessary prosecution. This inhibits settlements which are in the best interests of the bank but involve some concession or latitude inevitable in reaching the best compromise.
How these challenges can be addressed?
Mediation approach: A mediation approach, where an independent neutral engages with both parties, is more likely, practically and empirically, to lead to faster and better agreements. In joint and separate sittings with the mediators, this consensual, non-coercive and confidential process enables the parties to discuss options such as debt concessions, repayment schedules, interest reductions, perhaps even additional credit with safeguards.
A separate organization: Freedom to take sound commercial decisions must be statutorily structured, else all our schemes will come to naught. One way is to create a high-level body before which settlement agreements can be placed for approval. This body will examine the settlement to see if it is commercially advantageous and is in the interests of the public sector financial institutions, taking all prevailing circumstances into account. Where it comes to an affirmative conclusion, that should provide complete immunity — from the police, the CBI, the CVC, the Lokpal and the courts — for the officers of the bank who have negotiated and recommended such solution. This is a better step than oversight committees which do not provide the backbone to take the commercial decision of beneficial compromise.
Composition of the body: Such a body needs to be headed with high authority, drawn from the top echelons of the judiciary, the RBI and public sector banks, serving or retired. It should be a multi-tier body when the number of cases increases, which will happen because once you offer mediated solutions with protection for sound decision-taking, then both banks and borrowers will know that it makes eminent sense to try this approach which essentially means no risk in trying for a settlement, and no risk in agreeing to it.
It should however be noted here that a bad bank can at best be one of the many tools to deal with the stressed assets. Policy makers appear to give an impression that it is single shot solution to solve the problem. The government should also ensure that all other options –DRTs, CDRs, ARCs, SDRs and SARFAESI are made effective. The extent of bad debts in the system is too large for a single tool to be effective.