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ET view: Insolvency regulator must change track

ET Bureau|
Oct 09, 2018, 08.24 PM IST
0Comments
bankruptcy-lae
Going after personal guarantors is unlikely to lead to significant recoveries for banks, especially if the bad loans and defaults are huge
The insolvency regulator is training its guns on personal guarantors to recover bad loans. Nudging the new breed of insolvency professionals to attach assets of guarantors is not a good idea. It goes against the grain of limited liability. The reason is simple.

At risk, is only the risk capital that the promoter has invested in the enterprise. For an entrepreneur to risk her family’s future to get a loan is absurd. There should be no personal liability on the promoter beyond risk capital that she has invested in.

Personal guarantees are mostly given by directors who are in the management of companies, and banks insist on these guarantees ostensibly to check the tendency of promoters to exploit legal delays. More likely, bankers are abdicating their responsibility their responsibility to take a call on the viability of the project. This amounts to lazy banking.

Going after personal guarantors is unlikely to lead to significant recoveries for banks, especially if the bad loans and defaults are huge. It will also stifle SMEs that already find it next to impossible to get a loan from any bank. By chance, if they do, banks insist that they must mortgage their personal assets to secure the loan. This is a blatant violation of the principle of limited liability.

So, a swift resolution makes more sense than pursuing guarantors. Cleaning up the banks’ books would ease credit flow to business and spur investment and growth.
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