Setback for RBI

Central bank's role in IBC must not be curtailed

Prima facie, the Supreme Court’s judgment quashing the Reserve Bank of India’s (RBI’s) February 12, 2018, circular, mandating banks to recognise one-day defaults and invoke the insolvency process for such defaulters, is strictly in tune with the law. The apex court held that in the light of Section 35AA of the Banking Regulation Act, the RBI could not have issued a generic circular mandating reference under the Insolvency and Bankruptcy Code (IBC). The court also held that references under the IBC have to be on case-specific basis and with authorisation of the Central government under the Act. Thankfully, the court did not go into the other issues of the IBC, which is a relief because the country needs it for the credit system to work well. 

The judgment is the result of a petition by several private power producers and some textiles, sugar and shipping companies filed in August last year, after the RBI’s 180-day deadline for debt resolution had lapsed, arguing that the central bank’s “one-size-fits-all” approach did not account for the myriad exogenous factors that impacted their ability to repay their loans. The companies had also argued that they were negotiating with lenders for alternative resolution plans. The estimated debt impacted because of the February 12 circular was around Rs 4 trillion across 70 large borrowers, of which over Rs 2 trillion was in the power sector. Viewed from the vantage point of the power sector, Tuesday’s ruling is valid. Power producers’ problems are linked to political decision-making, over which they have no control. The principal cause of their bad debt build-up has been on account of “the huge delay and non-payment by distribution companies”. Indeed, discoms, themselves, are reeling from unpaid dues from state government entities — some Rs 16,000 crore, according to the latest data from the central government. This issue spirals back to state governments’ predilection for vote-bank politics and their reluctance to raise power tariffs for a whole raft of consumers, from farmers to rural households.

The quashing of RBI’s circular, however, means that the RBI would have little say in the IBC process, going forward. Given that all other methods of debt resolution did little, the banking regulator’s watch over one of the best and most transparent ways to resolve the debt crisis must be strengthened. It also means that as of now there is no RBI-sponsored scheme to restructure stressed accounts. Though the court has said that banks will continue to have an option to refer defaulting borrowers to the IBC in case the resolution plans fail, the quashing of the circular means there is no longer any imperative for banks to complete the resolution process within a specified period. That’s worrying because years of ever-greening and delay in recognising bad loans had led to a pile-up of nearly Rs 10 trillion in bad loans. The fear of being taken to the bankruptcy court has proved to be necessary and sufficient for a whole lot of borrowers to ditch the old mindset that repaying large loans is the banks’ problem. Since it would be wrong to kill this incipient banking discipline, the Central government and the RBI must come up with a plan that is legally tenable, unlike the February 12 circular.