Supreme Court’s order slows down RBI’s tough initiative to resolve the NPAs

RBI rattled as its loan recovery initiative encounters the Supreme Court’s speed breaker   

Just about 70 large borrowers have burdened India’s banks with a whopping Rs.3.8 lakh crores of bad debts, termed as Non-perfrming Assets (NPAs) in banking parlance. The default has nearly asphyxiated the banking system. MSMEs and other priority sectors now find it quite difficult to avail credit, because the banks don’t have the money, as their liquidity has dried up by the NPA load.  The proximity of some of the promoters of these companies has enabled them to ward off any harsh action from the lending banks to bring about  more discipline among the borrowers, and recover the amounts. The companies were able to cleverly hide their default under some well-meaning assistance programs of the banks, such as debt restructuring, stressed assets resolution, and the Scheme for Sustainable Structuring of Stressed Assets (S4A). Through such tactics, the defaulters were able to window-dress their sick accounts as healthy, and evade the attention of RBI and other bodies. In reality, the borrowers just bought time, when their companies continued to  plunge deeper into red.

Very disturbingly, in some cases, the bank managements were in league with the large borrowers in such ‘ever greening’ of accounts. The government chose to look the other way, because politicians benefited from the borrowers in so many obvious ways.

The RBI, wary at the shady nature of many of the promoters, enforced a strict guideline to enforce transparency. On February 18, 2018, it issued a circular that made it mandatory for lending banks to report defaults when a borrower fails to pay its loan installment even for a single day. Thereafter, the borrower is to be given six months to set its house in order, and make his account regular by clearing off dues in time. Failing this, the account has to be compulsorily referred to the NCLT. The NCLT has the power to adopt coercive ways to recover the amount. It can auction the company, and  force the original promoters to relinquish control of their companies and hand over charge to the chosen bidder.  All accounts where the loan amount was Rs.2000 croes and above came under the scope of this RBI circular.

Some aggrieved companies in the power, fertilizer, mining and infrastructure sectors approached the Supreme Court to seek relief. They argued that bunching all ‘apparently’ default cases to one category and pushing them to the NCLT was unjust as the companies were from different sectors where they faced adverse business conditions due to factors beyond their control. They said that action, if any, should have been taken on a case by case basis.

The Supreme Court upheld the stand of the borrowing companies and struck down the RBI circular. Experts say, the Apex Court’s objection is only technical, and doesn’t take away RBI’s powers to penalize the defaulters through insolvency proceedings under the NCLT.

Now, the RBI will mull suitable tweaking of its circular, so that it does not suffer the same fate again. It’s not a very difficult task, although some valuable time will be lost in the resolution of the NPAs. The borrowers will obviously be happy to see the Supreme Court’s verdict that gave them a further lease of life.

The central government has, in the mean time, indicated that it will invoke the Section 35AA of the Banking Regulation Act to empower the RBI to move against the defaulters on a case by case basis. But, the involvement of the government in the process appears to be a bit sinister. When the default has dragged down the entire banking sector with NPAs touching 10% of the total lending, the RBI should be empowered to move on its own, without waiting for a nod from the Finance Ministry. Everything has to be done to enforce responsible credit culture in the economy.

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