Last week, finance minister Pranab Mukherjee rejected the demand of some Members of Parliament (MPs) to disclose the names of companies that have defaulted on repayment of loans to public sector banks. According to media reports, the minister gave a number of reasons for not doing so. He said that there were confidentiality clauses in the loan agreement that prevented the names from being made public. So far, so good! However, he also seems to have said, “If this (disclosing names) is done, a person will be declared insolvent even before the Court declares them (defaulters) so. The chances of recovering money from them will, thus, become all the more difficult, hurting the interest of depositors in the end.”
The logic here is a little hard to appreciate. Revealing debt defaulters to the public at large may well violate the loan agreement, but it's hard to see how it would make the debtors less likely (or less able) to return the money. One would assume that they would already be doing everything in their power to return the loans.
I am reminded of something that was once told to me by a friend of mine, who had been in the business of giving and recovering loans for a long time for a variety of employers. In one particular company, recovering of small and medium-sized business loans had been raised to a fine art that was based on selective, accidental leaks of information. For example, for loans given to businessmen of a particular business-oriented community, the favoured technique was to try and call the businessman's home at a time when his daughter-in-law would be taking the message. According to my friend, who belongs to the same community, this was based on the way the social mores of that community apparently work. Having one's daughter-in-law (and presumably, her family) know that one was on one's way to insolvency is shameful.
Now, I understand that these demands for revealing defaulters' in parliament amount to little more than populist saber rattling and in any case they seem to come mostly from politicians who have shown no small enthusiasm for distributing public sector banks' money for their political ends. Still, it is worth wondering whether it may be possible to implement the daughter-in-law strategy for businesses. Legal issues aside, it is hard to see how more transparency in this matter could hurt in any way. What exactly is the logic here? In many countries, credit reports of all businesses and individuals (not just publicly listed ones) are available for a price to practically anyone who needs them. In India too, banks have been clamouring for an effective credit reporting bureau for individuals for a long time.
Why shouldn't similar information about businesses be available to anyone who needs to deal with it, whether as a supplier or a customer or an investor? One of the reasons why short-term investment dominates in India is that a lot of high-quality information is not available. The politics of revealing defaulters' names in parliament is a separate issue, but more transparency about the creditworthiness of businesses couldn't be harmful in any way.
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