In the middle of June this year when the union Cabinet approved the promulgation of an ordinance to facilitate securitisation and reconstruction of financial assets, there was much jubilation in the banking industry. For good reason. After years of crying themselves hoarse, bankers had finally been allowed to attach and sell properties of errant borrowers. After all, there's Rs 1,10,000 crore in bad debt to be recovered. Alas, their jubilation may prove short-lived. If some recent newspaper reports are to be believed, the government is planning to introduce a Lenders' Liability Bill. The ostensible reason is that it will complement the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Bill, 2002. The real reason, some experts fear, could be to leave an escape door open for defaulters.

Although the available information is sketchy, it seems the new bill is some kind of a balancing act intended to impose certain conditions on banks and financial institutions. Shorn of all legalese and double entendres, what it really means is that if a borrower goes broke, the lender may actually have had something to do with it.

Sounds funny? Certainly, but don't forget that the Indian financial market is rather peculiar. Banks and financial institutions are known to cut off supply of funds at the slightest hint of trouble at a corporation. So, there have been cases where a company has started building its factory, placed order for machinery, but the lender refuses to disburse the second tranche of loan because, say, the international market for that industry has crashed. The hapless company borrows at desperately high interest rates and somehow commissions the plant. But by then the cost of production is so high that the plant is unviable from day one. Price realisation falls, and spiralling interest cost pushes the company into the far end of damnation. Result: NPAs.

That said, there are instances too where banks and FIs have been taken for a ride by the promoter. The favourite trick being diversion of money into subsidiaries or privately-held companies. The problem with the argument in favour of a Lenders' Liability Bill is that it assumes corporate India is more sinned against than sinning.

If anything, industry in India has been more than indulged, thanks to the age-old nexus between corrupt political bosses and manipulative industrialists. In fact, while pushing for the securitisation bill the then law minister Arun Jaitley himself said that the system of creditors having to chase defaulters should go. One of the ways he tried doing it was by taking away the protective BIFR shelter under which many a promoter put his sick company to eternal rest. No wonder, industry reacted to the bill by calling it "draconian".

By backing the Lenders' Liability Bill what corporate India is trying to do is to create two different categories of defaulters: the wilful defaulter and, for the lack of a better word, the non-wilful defaulter. Some corporates maintain that defaulting on loans can happen because of a number of extraneous factors-like slow and inefficient legal system, distortions in the liberalised regime, demand recession, depressed capital market, and frequent change in policies, among others. So the distinction, they claim, is most important.

Another argument is that the securitisation ordinance should be exercised as an option of last resort. For instance, if the creditor pays 75 per cent of the principal amount and the rest in instalments, then the case should be settled out of court. By the same logic, the 60-day notice for discharge of full liabilities is far too harsh. Depending on whether the default is wilful or not, the time period should be revised.

Finally, some companies believe that the takeover code is not practical because banks and financial institutions just don't have the necessary skills to run businesses. But in all their arguments one question that's getting blindsided is this: does or does not the lender have a right to his money as much as promoters to their companies? If the Lenders' Liability bill ends up aiding defaulters, the answer to that may conveniently get buried in the fineprint of obscure laws.