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Letter to BS: Striking down RBI's Feb 12 circular a big blow to banking

This decision will set the clock back as far as progressive measures are concerned

Business Standard 

This refers to “Setback for RBI” (April 3). I have the deepest respect for the highest court of the land. The striking down of the February 12, 2018, Reserve Bank of India (RBI) circular in its entirety will however have far reaching adverse implications for the banking system. First, it would in effect revive the various forbearance/restructuring schemes in various forms introduced by the RBI that enabled banks to conceal and delay the classification of bad loans as non-performing assets (NPAs).

Second, the banks would be able to keep some of the biggest bad loans out of the scope of NPAs. The heads of many banks will be elated with the return of their “discretion” in this matter. Third, it will bring back complete lack of transparency in the classification of NPAs and requirements of actual provisioning for bad loans. It will bring back a degree of laxity in lending, knowing that even if loans go bad, the forbearance/restructuring schemes will prolong the repayment/recovery process.

Fourth, it would adversely impact the resolution process under the Insolvency and Bankruptcy Code (IBC). Many cases that should go to the National Company Law Tribunal will be languishing with the banks and the delays pending government approval will reduce the recoverable value of stressed assets to zero.

This decision will set the clock back as far as progressive measures are concerned. Quashing this circular along with the absence of substantive reforms of government-owned banks and the moribund Bank Boards Bureau, will deal a big blow to efforts to improve the working of/strengthening of the banking system.

The decision will provide relief to the powerful sections of defaulting borrowers and lenders looking for “flexibility” and “discretion”, at the cost of the bank depositors, the banking system and the public at large.

Arun Pasricha New Delhi

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First Published: Wed, April 03 2019. 21:38 IST