The talk of town in the last few days was the Supreme Court order striking down the RBI circular issued on February 12th 2018. The circular had made it mandatory that any borrower above Rs.2,000 crore defaulting on the loan for more than 180 days would be automatically referred to NCLT. The Supreme Court has struck down this circular on the grounds that they were ultra vires the powers of the RBI. It is a case of very strong words used by the SC for a statutory regulator.
Regulation has to overreach
If the issue is overarching powers to the RBI, then stringent regulation has to stretch to extremes. There was no other way to resolve the current NPA problem. At 10% gross NPAs; India is worse than Greece in terms of a banking crisis. The big problem today is that there is delay in disclosure of NPAs and by the time action is taken, it is just too late. Recently, it became clear that nothing was going to be recovered from the dues of Videocon and IL&FS Financials in the absence of any assets. These instances could have been easily prevented if timely action had been taken and the cases referred to the NCLT. Above all, the NCLT circular would have forced the banks to disclose any default immediately rather than use track 2 restructuring methods to recover these dues. Of course, the SC order still leaves government discretion but that may not be enough in most cases.
Creates Rs.3.8 trillion problem
The Supreme Court may have actually created an additional Rs.3.8 trillion problem for the banking system. The aggressive stance taken by the RBI and the NCLT in the last few years had not only forced the promoters to the negotiating table but also improved the balance sheet of PSU banks. With this one judgment, the SC has turned the tables in favor of the promoters all over again. For a long time, scores of promoters had been gaming the system and borrowing recklessly from the financial institutions. The aggression of the RBI and the NCLT had infused a sense of urgency and fear in promoters. With this SC order, nearly 70 such promoters are again going to get a fresh lease. Nearly 50% of these stressed loans of Rs.3.8 trillion belong to the power sector
Leave it to the regulator
Ideally, the SC should have left it to the discretion of the RBI. Of course, an aggrieved borrower always has recourse to the law and that’s protection enough. What the SC order does is to make the RBI more cautious and the promoters more brazen. But the biggest casualty of this order will be the onus on banks to disclose defaults immediately so that the 180 days settlement period can kick. India needs a model where public money in banks is protected. SC order has taken banks two steps back! ©
