Defaulters get a boost, NPA-resolution via IBC gets hit

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Updated: April 3, 2019 10:31:47 AM

Till this circular was issued, banks had a series of mechanisms to resolve bad loans—Corporate Debt Restructuring (CDR), S4A, etc—but the success achieved was very poor. RBI disbanded all these schemes and said that, henceforth, just the Insolvency and Bankruptcy Code (IBC) would be used.

By striking down RBI’s Feb 12 circular, SC has made it more difficult for banks to recover loans from defaulters By striking down RBI’s Feb 12 circular, SC has made it more difficult for banks to recover loans from defaulters

The Supreme Court’s decision to declare RBI’s February 12 circular on resolving stressed assets—defaulters, in plain English—as ultra vires is a big blow to banks that were looking for an early resolution to bad loans. Indeed, with this Supreme Court judgment, even the ongoing Jet Airways resolution can take a hit. While RBI can file a review petition, not too many review petitions get upheld. Till this circular was issued, banks had a series of mechanisms to resolve bad loans—Corporate Debt Restructuring (CDR), S4A, etc—but the success achieved was very poor. RBI disbanded all these schemes and said that, henceforth, just the Insolvency and Bankruptcy Code (IBC) would be used. If after even a day of default, this is not fixed, and no solution is hammered out in 180 days, the case would automatically be sent to the IBC. This was critical since, under political or other pressure, defaulters were able to find ways to get the banks to keep postponing a resolution of their debt on one account or another. With the February 12 circular, however, putting a 180-day timeline, there was a lot of pressure on defaulters; if they didn’t make good their loan payments, they could lose their company. Indeed, a large part of the repayments under the IBC have taken place outside the system; several defaulters started repaying loans to ensure their firms didn’t go to the IBC.

Many have argued that the IBC was a one-size-fits-all and that the Supreme Court did well to strike it down. It has also been argued that, very often, the default is not the promoters’ fault, so why should he be penalised? It is also argued that it is banks that should take a decision on whether to go to IBC and not RBI. There are many problems with these arguments. For one, it is because the other solutions like CDR or S4A didn’t work that the IBC route was chosen. Secondly, depending upon the political dispensation, amongst other reasons, banks could delay a resolution and keep giving more time to the defaulters; the February 12 circular took this discretion out of the hands of bankers.

It is true, as FE has written before, that the defaults are not always due to the fault of the promoters. In the power sector (bit.ly/2UaMiPD), around a fifth of the 52,000 MW of stressed power assets are gas-based ones where the plants simply don’t have fuel since the government policy no longer accords the same priority to power plants when it comes to allocating scarce local natural gas. Another 10,000 MW of assets are stressed because they are based on imported coal and the price of this has shot up and the SEBs are not willing to pay for this hike despite the Central Electricity Regulatory Commission (CERC) coming up with a solution more than five years ago. Around 20,000 MW of power plants are stressed as they don’t have long-term power purchase agreements (PPAs) since SEBs are simply not signing them as they don’t have the money to do so. Huge SEB dues to power producers are another reason for the default. In the sugar sector, a defective government policy that forces mills to buy all the cane produced and at an exorbitant price is at the heart of the default. But similar problems will apply to all loans, and just because government policy is at fault doesn’t mean banks—and through that, taxpayers—have to pay for this. India continues to suffer from years of slow investment because of the twin balance sheet crisis where both banks and corporates are financially stressed. The IBC and the February 12 circular were a way to resolve the issue, but the SC has now dealt a blow to the resolution. Banks, it is true, can still go to the IBC, but with the automatic referral gone, the power over defaulters has been whittled down.

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