Last week I taught my final class of the semester in Secured Transactions. Secured transactions is that area of law in the 50 United States (and other parts of the world) in which a creditor can obtain an interest in personal (movable) property of a borrower that, upon default by the borrower, permits the lender to take the property. Bank liens on cars are a common example. Mortgage lending is the equivalent in the field of real (immovable) property.
India does not have a functioning system of secured transactions, at least when it comes to commercial lending. This has the effect of turning a lender into little more than a supplicant when it comes to a borrower that doesn't pay. You can read about this peculiar state of affairs in The Economic Times. Apparently banks have no legal recourse against a non-paying borrower unless the non-payment is willful, as if the reason for not paying one's debts matters one whit.
Many folks might think think that a world in which loans need not be repaid except at the whim of the borrower would be a Utopia. They would be wrong. Banks have creditors of their own (depositors and large institutional lenders, including the state), and how will a bank repay its creditors if its lenders don't pay the bank? Obviously they can't, which means that the state must constantly bail out the banks. In other words, it is a nation's taxpayers who ultimately bear the cost of non-performing loans but it seems that few in India appreciate this truth.
This news item is of a piece with what I posted here and even here. My earliest piece was a commentary on India's lack of an insolvency system (I'll be teaching a course in Bankruptcy Law next semester if anyone wants to learn about the U.S. system) and the lack of a way to remove assets from an underperforming firm and sell them to more efficient entities (with the net proceeds going to the old firm's creditors) is part and parcel of a modern market economy.
India, and to an even larger extent China, have moved rapidly toward a market economy over the past 20 years. Yet, the "front end" of such a move is easy. What is more challenging is the back end, what to do about firms that fail. It is here that socialist practices have yet to be rooted out. And failing to do so has and will continue to operate as a brake on further economic growth.
India does not have a functioning system of secured transactions, at least when it comes to commercial lending. This has the effect of turning a lender into little more than a supplicant when it comes to a borrower that doesn't pay. You can read about this peculiar state of affairs in The Economic Times. Apparently banks have no legal recourse against a non-paying borrower unless the non-payment is willful, as if the reason for not paying one's debts matters one whit.
Many folks might think think that a world in which loans need not be repaid except at the whim of the borrower would be a Utopia. They would be wrong. Banks have creditors of their own (depositors and large institutional lenders, including the state), and how will a bank repay its creditors if its lenders don't pay the bank? Obviously they can't, which means that the state must constantly bail out the banks. In other words, it is a nation's taxpayers who ultimately bear the cost of non-performing loans but it seems that few in India appreciate this truth.
This news item is of a piece with what I posted here and even here. My earliest piece was a commentary on India's lack of an insolvency system (I'll be teaching a course in Bankruptcy Law next semester if anyone wants to learn about the U.S. system) and the lack of a way to remove assets from an underperforming firm and sell them to more efficient entities (with the net proceeds going to the old firm's creditors) is part and parcel of a modern market economy.
India, and to an even larger extent China, have moved rapidly toward a market economy over the past 20 years. Yet, the "front end" of such a move is easy. What is more challenging is the back end, what to do about firms that fail. It is here that socialist practices have yet to be rooted out. And failing to do so has and will continue to operate as a brake on further economic growth.
No comments:
Post a Comment