HYDERABAD: On Tuesday, just when RBI Governor Shaktikanta Das was about to chair his second Monetary Policy Committee review, the Supreme Court reduced the central bank’s controversial February 12 circular to a rump.
Das, who took charge amid conflicting times with the banking regulator getting into government’s crosshairs over surplus reserves, finds himself in yet another difficult situation. Will the RBI file an appeal? Will it restore past schemes, enabling resolution of bad loans? Or will it stand mute to concerns about its regulatory might?
The February 12 circular, or the Revised Framework for Resolution of Stressed Assets-2018 that SC struck down, subsumed a jaw-dropping 28 debt restructuring schemes dating as far back as 2001.
What’s damning is Supreme Court terming RBI’s amended provisions of the Banking Regulation Act as “ultra vires”, raising doubts if the banking regulator’s role is somewhat diminished.
“The government can either change the law to give RBI legal authority or set up alternative mechanisms (for debt restructuring). The PPP framework needs an overhaul along the lines suggested by Kelkar Committee,” Dr Arvind Virmani, chairman, Foundation for Economic Growth & Welfare (EGROW), told this publication.
Restructuring allows banks to keep loan accounts standard and prevent classifying them as Non-Performing Assets (NPA). The multiple schemes, instead of recovering dues, created a debtor-friendly environment, with restructured accounts suffering high failure rates, while borrowers indulged in repeated defaults.
Citing the bitter experience, the Reserve Bank argued that harsh measures were necessary in public interest as banks use depositors’ money (taxpayers’ money in case of PSBs) to lend, and hence, only a time-bound resolution process was considered a game-changer.
With the circular now sent to the scrap heap, what fills the void? “RBI has no compulsion to direct banks on loan restructuring. It did so earlier in the larger interest. Banks are free to decide if they want to restructure. Even if they don’t want to, that’s also permissible under the law,” said R Gandhi, former deputy governor, RBI.
“Nothing prevents banks from recovering money or taking errant entities to NCLT”. The fact is that they needed strong backing, which came from RBI, but now that’s diminished. “Now that support is withdrawn and banks have to fight on their own,” he added.
The bone of contention includes two Sections of the Banking Regulation (Amendment) Act, 2017 — Section 35AA and 35AB — empowering RBI to issue directions to banks on insolvency proceedings. A clutch of power and sugar firms argued that forced sale sacrifices public money without economic benefits.
Virmani pointed out that while taking up resolution of power sector bad loans, “the issue of power sector loans cannot be separated from state government’s monopoly over distribution, their failure to allow competition and the Union government’s controls on and incomplete de-nationalisation of coal sector.”
“It’s therefore a special problem and shouldn’t be confused with normal loans to, and loan repayment by, private firms in competitive, uncontrolled sectors!” he added.
The debate
The February 12 circular, or the Revised Framework for Resolution of Stressed Assets-2018 that SC struck down, subsumed a jaw-dropping 28 debt restructuring schemes dating back to 2001
RBI argued that harsh measures were necessary in public interest as banks use depositors’ money to lend, and hence, only a time-bound resolution process was considered a gamechanger
However, economists argue that power sector loans cannot be separated from states’ monopoly over distribution, failure to allow competition and the Centre’s controls on the coal sector
They also argue this is a special problem that shouldn’t be confused with normal loans to private companies in uncontrolled sectors