The reported warning by Securities Exchange Board of India (SEBI) to mutual fund companies against trying to bail out NPA accounts would be a serious dampener to revive companies that have been declared as NPAs. While the RBI dictate is already pre-existing, the warning by SEBI is a rather new development. This would in effect mean that the SEBI and RBI would prefer companies and firms to close down rather than make an attempt to revive them.
The stricter norms to prevent firms and companies, that have been declared as NPAs, from raising funds from any source comes in the wake of Kingfisher fiasco. It is very unfortunate that Kingfisher case has been taken as bench mark to paint all NPA holders as willful defaulter or fraudulent borrowers. There are thousands of accounts which have been declared as NPA as per prevailing laws, but the firms are otherwise supported by strong underlying undervalued or latent collaterals (not the Kingfisher brand type). This has not only been acknowledged by the Finance Minister on various occasions, but the even the RBI has said something on these lines while handing over a list containing names to top defaulters.
It is true that Mutual Fund managers may cut sweet deals with unscrupulous NPA firm owners and leave the Fund and its investors at great risk. But suitable mechanisms can be put in place to see that adequate due-diligence has been done and all prudent precautions have been taken before advancing any loan to a firm that has been declared as NPA by a Bank or Financial Institution.
NPA is a very nebulous concept. Mere default of 90 days constitutes a NPA. There are large number of industries where the defaults have arisen due inter-governmental wrangling, non-clearance of projects, temporary cash crunch and for various transient reasons. Be that as it may be, no firm has ever been in any business that has never faced a temporary cash crunch at one point of time or another. A prudent economic eco-system must be able to withstand such temporary issues and help sustain the industrial and commercial environment. Otherwise, there will be hardly any entrepreneurial enthusiasm in the country if the Damocles’ sword of NPA on flimsy grounds constantly dangled on the head of business community.
Every effort should be made to help revive firms so that they can come out of the woods and make a meaningful contribution to the country. Otherwise Make-in-India project may not go very far. For this the RBI & SEBI must have a clear vision on their part, and which must be communicated clearly down the channels and even the entrepreneurs and professional world should the boundaries of such refinance, or fresh finance or additional finance or what ever name it may be called.
