Is India’s Bank Loan Heist Legally Institutionalized ???

If you owe the bank a million dollar’s it’s your problem, if you owe it 100 million dollars it’s the bank’s problem - Donald Trump

Donald Trump may not have uttered too many wise words in his lifetime, but when he said “If you owe the bank a million dollar’s it’s your problem, if you owe it 100 million dollars it’s the bank’s problem”, he exuded the wisdom of a knowledgeable prophet.

The Indian banks have now for the past couple of years been overwhelmed by these problems, where scores of wealthy individuals have defaulted on massive amounts of loans, in so doing hurting the financial positions of these banks severely. Amidst this financial drama that is being played out, the reasons attributed to this loan problem are mostly economic and the ones enjoying the most attention are bad lending decisions by the banks or poor financial policy during previous governments.

The banking and monetary aspects of the problem have so loudly dominated the cacophony in this deafening debate, one easily forgets the most fundamental cause for such brazen ignorance of financial obligations, that is a slow and lethargic legal system, failing an economy that is showing sparks of global resilience and revival.

Money has become such an integral and universal part of our daily lives that one easily forgets the intricate details of what is written on the paper from which all our worth and value is derived. Every Indian currency note has this statement imprinted on it which goes by “I promise to pay the bearer, the sum of”, followed by the numerical value of the note on which it is printed ranging from 5, 10, 20, 50, 100, 500, to 1000. The currency we carry is thus principally the most fundamental contract on which all transactions are based.

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A loan is nothing but an advance on the contract to pay the lender a sum equivalent to the amount lent plus interest, on conclusion of a certain time period, interest being the benefit the lender is entitled to for taking on the time risk. One thing which is common in all these contracts, or should we say monetary transactions is “trust”. Some may be engaging in everyday exchanges of currency for daily items such as buying bread from the local grocer or others in billion dollar loans given by banks to businesses. Each of these financial transactions is dependent on the conviction and trust that each party has on the other to fulfill his obligation.

A party violating such trust or defeating such conviction essentially fails the foundations of the human economic system. It is to prevent such large scale failures, which ultimately lead to a mistrust in the trust system on which the economy is based, society came up with an effective contract enforcement mechanism known as damages.

Be it Shylock demanding a pound of flesh or a present day damages claim, enforcement of contracts to ensure a smooth financial system are as fundamental to a robust economy as the availability of credit. Economically progressive societies have always recognized the importance of execution of these everyday contracts and countries with a strong adherence to rule of law have always been better for running businesses and enterprises.

Implementation of contracts and punishing individuals who fail to meet their financial obligations, thus, effectively ensures that faith in the trust system of our economy is maintained. It provides a safety net against the risk of selling bread to a nonpaying customer or extending loan to a multimillion dollar business. The parties to the transaction know that if they fail to meet their end of the obligation which in these cases is paying up, they will be compelled to do so by the law of the land.

Accumulation of massive amount of bad loans attributed to willful defaulters thus raises doubts as to the efficacy of the enforcement mechanism. Surely after having an enforcement apparatus in place, people will abstain from defaulting on contracts, thereby breaking the trust which has kept society going for so long. Sadly an enforcement mechanism is only helpful if it is actually rendering the just and noble purposes it was originally intended to serve.

Seeing the likes of Vijay Mallya make a mockery of the financial system raises anger against the government controlled banks and the policies being pursued by the authorities. Seldom have people criticized the Indian Judicial system for creating an atmosphere wherein nowadays individuals can get away with impunity by violating contracts and destroying trust.

Slow, lethargic and poor contract enforcement by the Indian Courts have empowered violators and made them fearless in wake of failing to meet their obligations. When a buyer knows that he can get bread for free without paying and legally getting away with it, he is bound to never pay for bread again.

Applying the same rationality to the non-performing assets problem, the willful defaulter who in our case were or are high net worth individuals knew that they will get away with no or near zero legal consequences on default, that they were courageous enough to take the risk of willfully defaulting on their loan obligations.

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If a legal structure built to administer trust in a contract based transactional economic system fails, the ability of banks to give loans fails too and with it bombs the entire economy of the country. The rate at which cases involving contractual violations are disposed of by our country’s courts is so abysmal that it is akin to having no enforcement of contracts at all.

According to the World Justice Project rule of law index, India currently ranks 88 out of 102 countries in Civil Justice, 69th in regulatory enforcement and 90th in terms of order and security. The regulatory enforcement aspect of the rule of law index assesses how effectively regulations are enforced and our ranking is not surprising.

Ask any lawyer to honestly give a time assessment of a case and he would tell you that to test a man’s patience outright, subject him to the trials and tribulations of the Indian Justice system. Property cases drudging on for decades to cheque bounce cases taking years to resolve with a prospect of significantly low damages.

The enforcement mechanism is so poor that any policy directives towards guaranteeing greater economic activity shall be futile till we simultaneously do not take steps to resolve the Indian legal system and its dismal speed of trial.

It is not as if the country is plagued with a nascent, underdeveloped and relatively young legal justice system. Strong legislations as well as jurisprudence are wide and varied within the Indian legal system.

The Indian Supreme Court too has on several occasions recognized the importance of speedy justice and has repeatedly held that swift legal proceedings are included within the wide ambit of right to life and liberty guaranteed under Article 21 of the constitution. In Hussainara Khatoon v. Home Secretary, State of Bihar, the apex court categorically held that “a procedure cannot be reasonable, fair or just unless it ensures a speedy trial for determination of guilt of the person deprived of his liberty.”

Though the highest court of the land as well as other administrators of justice realize theoretically the importance of a justice system upholding and enforcing trust that forms the basis of all economic activity, little regard is given when it comes to reforming the system from within.

The Supreme Court it seems is, at present, content with masquerading as the super executive control freak which wants to decide the fate of every issue ranging from the administration of cricket to deciding which states need to be declared drought affected.

With the top court distracted in fulfilling its long held ambition of dominating the executive, it is unlikely that it will find time to reform the archaic Indian legal system in the near future and this is bad news for the economy and all of us who have been hopeful of a revival.

Rohan Shridhar is a law graduate and legal activist from the state of Himachal Pradesh

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