RBI’s bad move on loans

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  • Rebecca Harding Davis

The Reserve Bank of India (RBI) is understood to be weighing a plan to ‘incentivise’ lenders to take errant borrowers to bankruptcy court.  It’s part of the regulatory countermove that RBI is working on to overcome hurdles in the wake of a recent Supreme Court ruling. A month ago, the apex court struck down RBI’s February 12, 2018 directive that gave defaulting companies 180 days to agree on a resolution plan with lenders or be taken to bankruptcy court to recover debt of Rs 2,000 crore and above. Assigning lower risk on bad loans may not necessarily be an incentive for banks to pursue proceedings against errant companies under Insolvency and Bankruptcy Code (IBC). The RBI move in this regard may at best be an ugly patchwork to free banks capital with capital adequacy ratios, resume full throat credit operations and give a kick-start to slowing industrial and business activities. At best, it could be half hearted attempt for RBI to get around the Supreme Court order that squashed the February 12, 2018 circular asking companies to find a solution to bad debts within 180-days under IBC. The Supreme Court had questioned the ‘locus stand’ of RBI to direct banks on bad loans, set timeframe for cases involving Rs. 2,000 crore and more.

This position needs to change comprehensively if RBI needs to assert its role in regulating banks and financial institutions. RBI Governor Shaktikanta Das is sadly mistaken to believe that the latest move may bring back the credence central bank lost. Limited purpose of lower risk allocation to bad loans within the capital adequacy ratio may nudge some banks to move against companies with sticky assets under IBC. Capital adequacy ratio determines quantum of loans a bank can disburse against its equity and reserves. As per reports, RBI thinks that ‘risk allocation’ on assets with banks was well within its mandate and the Supreme Court may not have issues with the move. But then, this step alone may not be sustainable in the long run.

To conclusively resolve the issue of non-performing assets with banks, RBI will have to put together an alternative framework with nuance-laced approach that’s well within its mandate. Alternatively, RBI will have to work with the new government that assumes reins by May end-June first week and other stakeholders to revalidate its February 12, 2018 order thereby making Supreme Court directive null and void. Another option is to challenge the highest court’s directive on 180-days resolution plan with 90-days additional window under IBC and National Company Law Tribunal. Securing unquestioned powers under IBC through an amendment to IBC approved by both Houses of Parliament would provide lasting solution to bad debts’ issue and settle the issue of RBI powers once and for all. Given that banks have taken over 57 per cent haircut in resolving 94 large bad loan cases against admitted claims of Rs. 1.75 lakh crore last fiscal, a fresh look on the entire process seems necessitated. Given that Indian banks were saddled with bad loans of over Rs. 10.83 lakh crore, cleaning up their balance sheets along with those of companies will go a long way in restoring credibility of banking system.


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