Throwing baby with the bathwater

The Supreme Court recently quashed the February 12,2018 circular of the RBI. The circular had enjoined on banks to recognize defaults by borrowers of Rs 2,000 crores or more within a day of their failing to meet the repayment schedule and, after providing a grace period of six months, start proceedings under the Insolvency and Bankruptcy Code.

The apex court voided it on the ground, among others, that the central bank’s one-size-fits-all prescription failed to note unforeseen circumstances attendant upon different borrowers. In this case, the power sector borrowers were said to have defaulted due to adverse returns following a sharp fall in the solar energy prices.

However, the spirit behind the RBI circular needed to be respected. And the central bank in consultation with the Finance Ministry must come out with an alternative plan to enforce credit discipline and to prevent big- loan defaults. Unless borrowers are made to realize that bank loans have to be repaid with due interest the problem of non-performing- assets would continue to bleed the taxpayers.

A measure of toughness which was duly reflected in the impugned RBI circular must be retained when a corrected alternative is issued by the central bank with proper legal vetting. Telephone banking and ever-greening of loans stopped overnight when the Modi Government assumed office but it still had to spend over three years to try and recover at least a part of the NPAs before the banks could be in a position to lend again.

Striking down the RBI circular in one fell swoop without giving the central bank the benefit of the doubt could have been avoided. Instead, the apex court could have asked it to amend it in order to accommodate special circumstances beyond the control of a select few borrowers. Now all seventy-odd borrowers against whom proceedings were started under the said circular have been let off the hook.

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Free Press Journal