Need for personal bankruptcy law

Lack of a personal bankruptcy laws is one of the many ironies of the state of legal system in India.

Picture this, if a company gets into a situation of too much debt (either because it takes on too much debt in absolute terms or because its repayment ability falls), it has many avenues to restructure its debt, to pay lower interest rate, to have debt waived off temporarily or permanently, fully or partly. The business gets protection from seizure of property/assets so that it can continue normal operations. Indeed the SARFAESI Act was passed a couple of years ago, because the bankruptcy law was too heavily skewed in favor of (commercial/corporate) borrowers.

However, if an individual gets into too much debt, he is doomed. He has almost none of the options mentioned above as being available to commercial/corporate borrowers available to him. Farmers are comitting suicides every day because of being in a debt trap.

Logic demands that if a company has the option of getting its debt restructured, interest and/or principal waived/reduced then so should an individual. But this does not happen in a formal sense. It needs the problem getting out of control (which means lots of suicides and lots of headlines) before the political class 'comes to the rescue' and a temporary 'band-aid' is put on. But this essentially is a one size fits all approach and the decision is 'forced' onto the lending institutions which is unfair. So, we a formal legal procedure that is put up once and for all, else this process is repeated almost every other year.

In fact I would argue that the need for having a bankruptcy law is even greater for individuals than for corporates. In case of invidiual it is often the question of survival. Secondly, a company getting into a debt trap can be put an end (be liquidated) - but you cannot do that with an individual. So, in case of an invidual/household getting him/them out of debt is the ONLY option. Secondly, once in a debt trap unless there is some structural mechanism available, it is almost impossible to come out of it thanks in no small way to 'compunding' the 8th wonder of the world as Einstein put it. Thirdly, in case of individuals, debt trap affects not just that person but his family - so there is collateral damage (Ironically, in case of corporate its employees may get laid off nor not get paid and it is then that they need help with their debts and it is precisely then that they do not get any help while their company continues to get benefits!)

Now, it is not my argument that banks/lenders in India are insensitive or unaware of this. Nor is it my claim that banks/borrowers are overly harsh all the time. But it is certainly my case that there is no formal law which lays down ground rules of how to deal with such a situation, the rights of borrowers (it cannot be the case that banks/lenders have all the bargaining power) and the various types of settlements which are possible so that borrowers can have a reasonable hope of getting out of the miserable situation they find themselves. We need a proper law which puts this and many other things in writing.

For example, the personal bankruptcy law (which incidently was tightened a year or so bank as it was perceived to be too lenient and favouring the borrowers!) covers things like who is eligible to claim personal bankruptcy, under what circumstances, what are the assets that cannot be seized, how and to what extent can debt be waived off or deferred etc etc etc. All these are fairly important issues.

Now, the immediate reason for writing this post is the farmer's suicides. But the need for this law will increasingly be felt as the 'credit' culture gets seeped in the soul of this country. Hitherto, since credit penetration at a personal level was very low, the need for this law was not felt (apart from to the extent individual businesses/farmers etc borrowed). However as increasingly almost every thing is brought on credit (remember credit card is nothing but a unsecured loan!) and as the marketing departments of all financial institutions work overtime in trying to get people take on credit - it will not be surprising to see more and more people getting into debt traps.

In fact another side benefit of this law would be that if banks have to take some losses under this law - either through deferrals or waivers etc, it will force their marketing managers to use a bit of judgement in extending credit.

That's it for now...

The irony of Belgaum issue

Belgaum is a district south east of Maharashtra and lies at the centre of a border dispute between Maharashtra and Karnataka and has been so for more than 4 decades. The problem is this - the organisation of states in India was done on linguistic lines and in Belgaum the division between Marathi speaking and Kannada speaking people is almost 50-50 (well almost because Maharashtra claims it has more Marathi speaking people and Karnataka claims it has more Kannada speaking). The dispute has seen protests, court cases, strikes and even threats of arrests of major political leaders on either side.

I do not wish to get into the merits of the case but the issue does raise some interesting points

• I find it ironical that here is a country which has border disputes within its states for more than 4 decades and it has not yet managed to solve them - and this country claims that we would find peaceful solutions to border disputes that it has with its neighboring countries.
• What this dispute and especially its lack of resolution tells me is that there are vested interests (read: political parties) which have an interest in keeping the issue alive so that it can be appropriately stoked or calmed depending on what suits them at that particular moment.
• Another point which this raises is how regionally divided we are/feel. It matters so much to people to be classified as belonging to a particular state rather than other, especially when since the region remains the same and on a day to day level, it will at the end of the day not make any material difference.
• What this issue tells me is also how emotional some of these issues are and unless we really understand the moot emotional reasons and address them, we can never be able to reach a solution - unless we allow enough water to pass under by when the issue loses its very foundation. In this case it would be large scale geographical movement of people whereby the concept of being belonging to a state is no longer synonymous to being physically residing in the geographical borders of it. This is what is precisely happening here with Bangalore (capital of Karnataka) becoming the IT capital of India.

Finally, it raises a more fundamental question - what does it really mean to be a 'Maharashtrian' or a 'Karnataki' or for that matter an 'Indian' or 'American' or 'British'. For this I hope to write a seperate post.

That's it for now...

Full circle - Delhi sealings, Deja vu

In January of this year I had a posted a note titled "The Demolitions Must Continue" arguing that the demolitions etc (Ulhasnagar and Delhi at that time) must continue. The logic being that unless the offenders are forced to pay a 'cost' for their actions, necessary change in behavior would not occur either with the affected people or the society at large. This is extremely essential when the problem concerned (illegal construction/occupation) is widespread.

However we have not learnt anything and the problem continues to surface again and again and will continue so, unless we set the right precedents and instil a degree of credibility in the laws that we make.

Lets take a look at what has happened since January - Illegal constructions in Ulhasnagar were regularised, Illegal constructions in Delhi were regularised, Illegal constructions in Dombivli are being regularised, the cut off date for slums in Mumbai extended from 1995 to 2000 (earlier extended from 1975 to 85 and 85 to 95!).

This is nothing but a band-aid over the systemic issues we have with respect to illegal constructions. The construction lobby is powerful and is in cahoots with the executive (the local municipal authorities in each respective cases). The message we are sending out to these people is that what you have/are done/doing is OK - if sufficient number of people start protesting then we will pardon/excuse your transgessions. Does this give them any reason to all of a sudden start respecting the law?

Edward Prescott and Finn Kydland were awarded the Nobel prize in economics for 2004. Part of their work focussed on time consistency of economic policy wherein they argued that what matters is not rules and regulations but the perception about credibility and enforceability of these regulations/rules. In other words what they are saying is that it is no use making all those rules and regulations if people at large do not belive that these rules will actually be enforced - they will not change/modify their actions to conform with the changed/new rules/regulations/norms.

And it is the powerful logic above which we have seen being played out time and again - be it illegal construction, illegal slums, tax evasion, licenses etc. In fact this very well typifies the 'chalta hai' attitude that is considered so prevalent amongst we Indians. If 'chalta-hai' does not indicate people's faith that law will not be implemented then what else?

And it is not necessary to have 100% implementation - but what is needed is implementation adequate enough to change people's perceptions. And for that we need to make a start and then make the system fool proof as we go along.

A simple example of how this can operate will help. I use the suburban railway train everyday to commute to office and I have my season ticket for that. But if I have to take a journey not covered by the season ticket (which happens rarely) I normally do not bother taking any ticket and travel without ticket. Why? I simply do not think it is worth my effort standing in the long queue to take the ticket when I see no ticket checker along - anywhere! But if I simply see a ticket checker once in a while or hear from someone that they are seeing ticket checkers nowadays, I perception of things would change and I would think twice before travelling without ticket - for what is at stake is not just the fine and ticket money but also my standing in society. I would find it extremely embarassing caught without ticket in a railway train or station (in front of 100s of people). This is how you bring credibility to your rules and regulations.

And so if we want to get rid of this 'chalta-hai' attitude, then the first thing we have to do is go about enforcing our laws - however old or ridiculous or 'painful' they may be. In some cases changing law may need to go hand in hand with enforcement - but enforcement at any cost cannot be allowed to lag.

It's about time, people are made to pay for their transgressions!

That's it for now...