Neither banks nor borrowers were obliged to share such privileged information. Societies and sovereigns had learnt to live with the order. That changed when listed companies in advanced markets were told to disclose ‘material events’. And loan default — an unambiguous signal for traders to hammer the stock the moment they had a whiff of it — was one such event.
In India, however, a veil of secrecy continued to shield borrowers, with banks, till recently, unwilling to share loan details of specific clients and companies preferring to hold back such information in the absence of any specific regulatory directive to disclose.
In case the word was out, companies and their image merchants described the ‘default’ as ‘delay’ to airbrush the news for media and analysts. Corporate defaulters found themselves exposed, either when there was a hue and cry raised by retail depositors, or when the harsh discipline of the bond market compelled trustees of these traded securities to reveal the truth that immediately sparked a credit downgrade by rating agencies.
But a failure to pay interest, or principal, on loans (unlike bonds) lying in the books of lenders remained a secret for weeks, and even months, among banks and the Reserve Bank of India (RBI). Rating agencies, whose key job is to assess the probability of default, were also shown the rule book and left in the dark.
Even if a few market sharks could fish out and cash in on the insider information, lay investors remained clueless about it.
RBI’s concern stemmed from the unwarranted hassles a company might face if technical reasons — such as holidays, snag in the electronic payment system, or a late cheque by a customer — cause a delay of a week of two in the servicing of a loan. The consequences of such information coming in the public domain may push up a company’s cost of borrowing, lower stock price and even shrink the order book.
And, sometimes, companies do pay up a fortnight after missing the loan due date. Banks wait for as long as three months from the day of default before declaring an unpaid loan as ‘non-performing asset’ (NPA). Last week, the Securities and Exchange Board of India (Sebi) told all companies whose shares or bonds are listed on exchanges to disclose default on loan within a month after the due date.
While the market regulator has no extra jurisdiction over banks, it can direct listed entities to share all information that it thinks is price-sensitive. A month may be a long time in financial markets, and the grace period could be a fortnight. But the very in formation that banks so far held back — and still do — on grounds of client confidentiality will now be public, as borrowers are forced to reveal it.
But a culture that discourages default must go beyond bank loans. Sebi’s fiat comes at a point when many middle-level and small companies are gasping due to low demand, monthly outgo on account of the goods and services tax (GST), low loan disbursal from non-banking financial companies (NBFCs) — a quick, and often the main, fund source for many — and delayed payments by large corporates and government on goods and services procured by them. In a slow economy, many companies manage their working capital by holding back payments to vendors.
Pushing companies, as well as state and central government departments, to pay suppliers and service providers on time is tougher than pressurising companies to repay loans to avoid loss and embarrassment. A trail of irresponsible acts makes big banks and big borrowers obvious targets when chips are down. After the meltdown of2008, even Swiss banks ceased to be citadels of secrecy, abandoning the policy that was adopted by the Great Council of Geneva in the early 18th century.
In such a milieu, protecting identity of defaulters of banks that have to be bailed out every few years with taxpayers’ money cannot be justified.
Good Guys Too
Simply naming and shaming wilful defaulters is not enough, as many of these borrowers have either escaped or been reduced to insignificance. However, asking companies — including those whose shares are not listed, but bonds are traded on exchanges — to disclose loan defaults is a step towards greater transparency in the financial markets and probably fewer delinquency. It’s a story that will find ready takers. Indeed, it’s amazing that regulators took so long to implement it.
But the stern disclosure rule can suddenly look incongruous, even unsettling, if decent companies are unable to meet the payment deadline due to genuine mismatch in cash flow, dwindling demand or troubles of a large customer. If consumer demand and company earnings fail to pick up, a good measure may look like another righteous move at a wrong time.
DISCLAIMER : Views expressed above are the author’s own.