Supreme Court rulings on RBI seem contradictory. Also, making bank inspection reports public can trigger a panic, so caution needed.
With the Supreme Court coming down hard on RBI for not releasing information on bank inspection reports and for not making the names of loan defaulters’ public, chances are the central bank will have no option but to comply now. To an extent, the SC’s impatience is understandable. Gross NPAs of the banking system have ballooned from Rs 1.9 lakh crore in 2013 to Rs 6.1 lakh crore in 2016 and to Rs 10.4 lakh crore in 2018, so when the central bank doesn’t put out the names of defaulters, it looks like it is helping them. Indeed, given how the central bank has been pushing banks to come clean on NPAs, and to pursue defaulters using the new insolvency code, the central bank’s stand on not making the names public makes little sense. In any case, with most of the names of the big defaulters known anyway – the RBI itself directed banks to take action against the top 12 – it makes sense to comply with SC’s directive and make the names public.
It is true, as RBI has maintained, that not all defaulters are ‘wilful defaulters’ since, very often, there could be a business failure or there could be matters beyond their control; like, say, the state electricity boards not clearing their dues on time. But, classifying defaulters as NPAs is critical if banks are to create provisions. Also, even if a default is for a genuine reason, if the business needs restructuring, classifying it as an NPA and going to insolvency courts is critical. Also, making lists of defaulters’ public has another salutary impact: it makes it easier for credit-rating agencies to come out with default models that work better. One of the reasons why ratings are more difficult in India is that if loans are ever-greened, as they were in the past, there is no instance of default and so, no model can ever correctly predict default.
Ironically, though, SC itself appears to be in two minds on defaults. Its latest direction, giving RBI one more chance to make the names of defaulters’ public suggests the apex court wants to deal harshly with them. Yet, by striking down RBI’s February 12 circular a few weeks ago, it has become easier for defaulters to get away with not repaying bank loans on time; as per the circular, banks had to declare even loans with a one-day default as defaulters and, if no solution was found to the problem within 180 days, the case would automatically be referred to the NCLT under the insolvency code.
The second part of the SC directive to RBI pertains to making public – under the Right to Information Act – its inspection reports of various banks. Once again, this is related to the rapid build-up of bad loans and appears a reasonable demand, but disclosing such reports is a double-edged sword. It would certainly be good to know if RBI itself got to know about the problems in bank balance sheets through the annual inspections or whether it, too, was taken in by the window-dressing done by the banks. So, for instance, while the government took stern action against a former PNB head for the Rs 11,300 crore Nirav Modi was able to raise based on what turned out to be fraud guarantees given by PNB’s Brady Road branch, was the central bank able to catch this in its annual inspections? Indeed, if RBI inspections are not able to catch fraud at the banks it inspects – and making public the inspection reports will help settle this question – then the system of oversight needs a complete overhaul. The flipside of this, however, is that if there is a problem in a bank that the inspection report points to, and this report is made public, it can create panic about the solvency of the banks; that is why, in the past, when some banks have been in trouble, the RBI has arranged marriages with stronger banks to ensure the integrity of the banking system is not endangered. The Supreme Court needs to reexamine the issue before issuing a final order.