Institutional Funding and work around.

Yesterday I was having chat with one of my learned friend, who takes keen interest on economic nuances, how the economy is likely to behave, who is supposed to borrow, who is supposed to lend and how the money needed to be refunded?

The core question that we were discussing. who is responsible to pay once the money is borrowed and invested by the borrowing company. What is the role of shareholders or it is the lender who should be at the receiving end.

We have seen many instances world over that company borrow the money, invest it as per the business plan, business does not perform, company fails to generate cash flow that makes it unable to pay and the lender suffers, litigation commence!!!

The point that I am trying to make is - How do we deal with this. The mounting NPA and continued default is shaking the inner consciousness and we are not able to deal with this. Group like Tata does not default, the bank does not suffer. Here I am not promoting any group I am just creating a process of thinking.

The mute question that hound us - who is responsible for NPA, default of debt repayment.

To my mind it is a collective failure. There are two type of default -

One is that there is down turn in industry and it was beyond the capability of human mind to gaze it while preparing the business plan. 

Another one is that Company abuses its power and uses it other than the legitimate business purpose.

Let we deal with the situation where external forces, that could not be gazed, forces an industry to be on spin. The unexpected blow creates pressure on revenue and price. Best of the industry suffers. Financial covenants gets breached, industry having best of intention to meets its obligations gets incapacitated. When I say that it goes beyond human mind I refer both to lender and borrower. I think we need to find a solution to deal with it. Today down turn in steel industry, Real estate and infrastructure is passing through this down turn.  Yesterday's best player are struggling  to find  ways to keep the nose above water!  It is extremely important that both lender and borrower work together to salvage the situation. Here my underline assumption is that the intention of the borrower was good and will continue to remain good. the borrowed money was used legitimately and was utilized for intended purpose.

In this scenario I feel that there was a i business risk that was existing, though unknown to human mind. Such situation needs a pragmatic dealing. It requires concerted effort to be agile and cooperative to come out of the situation. Borrower needs to adjust business leaver, rather than taking advantage of the situation. In case of real estate the builders and investors are sitting on huge unsold inventory and it is within their power to sell these units to realize the intended cash flow. But they are not willing to adjust leaver and continues to carry default. Such situation should be avoided. We need to work clearly on the assumptions that borrower has lien over our decision. Though I do not recommend such  decision in case of steel industry for India. China is dumpling its steel to India at a price lower than cost, no company can beat the price. They can continue to incur losses and eventually will move from bad to worse!! Here a collective wisdom should play the role. These down turn does not continue for a very long time and a careful evaluation of the situation can help. The agile mind supported by analytical and deep thinking will find ways. The borrowed fund will remain to be protected albeit with a different covenants!

However in the 2nd category where company abuses its powers, I think application of mind for the change of covenants is criminal. Institution should not spare these companies and the people behind these companies. They should not be allowed to fly and neither be allowed to use its muscle to threaten the borrower. These people should be brought to justice sooner than later. In these cases personal guarantee needed to be invoked, and the case should not be speculated like a framer speculate with God Indra for the rain! It has to be dealt with iron hands so that the public money does not change hands so regularly. We have noticed many instances where a man travel in expensive luxury and the poor employees sleeps in hunger. The intended false statement should be torn into pieces and the banks and institution should not behave like a fool and buy these statements. the biggest fault lies with the lender. they do not monitor their money, they believe what apparent to be false, they do not do their home work or their vision and action gets clouded for the reason best known to them. We need to have heavier legislation to deal with quick result. Post fiasco there is always a competition among agencies to sought at the top of their voice - unfortunately no one is there to hear! Lender consumes the time of court, which is any way struggling badly to provide justice to the people who are in dire need. Arguments, cross examination and rumor decorates the 1st page of morning dailies! Should the public money change hands for these news! Are we really serious about it? Can we as a country afford such mismanagement? Who is ultimately responsible for these man made financial fiasco?