instrument to end npa crisis – ‘irreversible debit order’

country’s banking system is reeling under non-performing assets and a solution is being sought by way of forced bankruptcy, takeover of management and rulings by national company law tribunal. this basically means that the disease is being cured after it has managed to inflict irrevocable damage. a simple tool, in the form of ‘irreversible debit order’, can however bring an end to this by immunizing banking companies against loan defaults.

an ‘irreversible debit order’ or ‘ido’ can work as an instrument of repayment of debt facility availed by the borrowing entity from the lender.

in the present setup, the borrower, who either pays through cash/ cheque or an instruction in form of automatic monthly debits from bank account toward repayment schedule, has an upper hand. the borrower can either choose not to make the cash/ cheque payment on the pre-decided date or he can instruct his bank to not allow further automatic debits from his/ company’s account toward loan repayment.

it is entirely on the desire of the borrower to delay repayments, after which the lender resorts to reporting such cases as stressed/ bad debts. in most of the cases where the borrower delays repayment to the lending entity, it is only his ‘will’ that lacks, not his ‘capacity’.

this is where the law needs to be strengthened. unlike in cases where the borrower is genuinely facing financial crisis, instances where only his willingness to repay lacks, he must be ‘compelled not requested’ to repay on the very date as per the schedule and this agreement must be backed by an irreversible debit order.

ido will not work as standing instruction or anything of that sort, but as a guarantee to the lender that the borrower will abide by the contract of repayment at least until he has the capacity of doing so. the ‘irrevocable’ nature of such contract between the borrower and lender will ensure that companies which deliberately delay repayments are barred legally from doing so.

to make this a reality, a separate bank account for a borrower company can be set up which should be linked to company’s current account/s and all other places where the revenue received is stored. the repayment of credit availed by the company from the banking system should have ‘first preference’ over all other liabilities.

this way, the need to move courts and tribunals for receiving back the amount extended as credit by banks will virtually no longer exist. any npas will only be due to genuine financial incapacity of the borrower and can be recorded in real-time. if worked out wisely, there shall exist no need to liquidate company’s assets, which entails a lengthy and cumbersome process, for repayment to creditors.