RBI circular

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The Supreme Court (SC) decision to quash a circular issued by the Reserve Bank of India (RBI) on resolution of loans that have become bad over a period of time is definitely a setback to the evolving process for debt resolution. The SC order comes close on the heels of the BJP-government’s move to write off loans of major corporate houses and fund the banks from public money to infuse capital to save financial institutions from collapsing in a matter of few years. How this order has come and at whose instance for staying the debt resolution process is best known to the powers that be at the centre and the way it moves in the next few months. Moreover, this circular came at a time when the general elections were to be announced and could have a major impact on the small time savings of the common masses and the bad debts of the big corporate houses. The BJP-government which infused around Rs three lakh crores in the budget for banks after having written off the loans of some select corporate houses is questionable and the government owes an explanation to the people, who contribute their hard-earned money to the state exchequer. The SC declaring the RBI circular as void could slow down and complicate the resolution process for the loans aggregating to as much as Rs 3.80 lakh crores across 70 large borrowers, according to the data from the ratings agency International Credit Ratings Agency (ICRA). The RBI circular had at one time forced banks to recognize defaults by large borrowers with dues of over Rs 2,000 crore within a day after an installment became due; and if not resolved within six months after that, they had no choice but to refer these accounts for resolution under the Insolvency and Bankruptcy Code (IBC). Mounting bad loans, which crossed 10% of all advances at that point, and the failure of existing schemes such as corporate debt restructuring, stressed asset resolution and the Scheme for Sustainable Structuring of Stressed Assets (S4A) to make a dent in resolving them formed the backdrop to this directive. The circular was aimed at breaking the nexus between banks and defaulters, both of whom were content to evergreen loans under available schemes. It introduced a certain credit discipline that banks had to recognize defaults immediately and attempt resolution within a six-month timeframe, while borrowers risked being dragged into the insolvency process and losing control of their enterprises if they did not regularize their accounts. RBI data prove the circular had begun to impact resolution positively in some ways. But the government’s motive behind such a circular was not known for the reason that somehow, the central government extended benefits to select large borrowers for their doubtful vested interests. Now, it is this credit discipline that risks being compromised not only by the SC order but also the government’s intent. It is not surprising that international ratings agency Moody’s has termed the development as ‘credit negative’ for banks. It is true that the circular failed to take into account the peculiarities of specific industries or borrowers and came up with a one-size-fits-all and one-formula for all approach. It is also true that not all borrowers were deliberate defaulters, and sectors such as power were laid low by externalities beyond the control of borrowers and the market conditions. The RBI could have addressed these concerns when banks and borrowers from these sectors brought these issues to its notice. By taking a hard line and refusing to listen to the representations, the RBI may only have harmed its own well-intentioned move. That said, it is now important for the central bank to ensure that the discipline in the system does not slacken. The bond market does not allow any leeway to borrowers in repayment, and there is no reason why bank loans should be any different from other borrowings. The RBI should study the judgment closely, and quickly reframe its guidelines so that they are within the framework of the powers available to it under the law and free from the influence of the political party that is in power. Otherwise, the good work done by the RBI in debt resolution in the last one year will be undone and may suffer from inherent weaknesses.