Courts like the NCLAT and the SC need to understand the implications of their rulings.
While it is good news that the central bank has finally challenged the NCLAT order that prevents RBI from forcing banks to declare their loans to IL&FS as NPAs – and then make provisions for them – it is unfortunate that the NCLAT seems to be determined to stick to its position. In its last hearing, the NCLAT said the RBI was making “it a prestige issue”. As a regulator, it is the RBI’s job to ensure the banking system is safe; if it is not, crores of households are in danger of losing their life’s savings if they are deposited in banks. For the banking sector to be safe, banks need to honestly state what their financial position is – if this is precarious, the owners like the government or private sector entities bring in more capital – and, as part of this exercise, banks need to declare NPAs on time and start making provisions for them. Anything that interferes with this ability of the RBI to ensure banks follow fixed rules creates a problem since the bank books will no longer reflect the situation on the ground. Sadly, it is not just the NCLAT, even the Supreme Court is examining the validity of the RBI’s February 12 circular that said banks have to report defaults of even one day on a loan and, if the default is not corrected within 180 days of this, the loan automatically goes to the insolvency courts.
As RBI told the NCLAT, while it is possible the reasons for IL&FS’s defaults may be different from those for some other company, “the nominal principles governing the resolution of the stressed assets are uniform across various sectors … the banks’ recognition of financial stress on their books, and provisioning for such financial stress, need to be sector-agnostic”. It is IL&FS that is looking for a waiver at the NCLAT, and the government is batting in favor of other sectors like the power sector at the Supreme Court. If more and more sectors get a waiver and banks don’t declare their loans as NPAs, how long will the system be able to carry on with dud loans? It is, in fact, because dud loans were carried on the books for so long – but disguised as performing loans – that the banking system is in the mess it is today. In even December 2015, RBI was projecting a 4.9% NPA level for March 2016 and a 5.2% level for September 2017 in the baseline scenario; the actual NPA levels, it turns out, was 7.6% in March 2016 and 10.2% in September 2017. While RBI has got more accurate in its predictions now, if the RBI has to make exceptions due to the NCLAT/SC, this will get worse soon. Indeed, as RBI has pointed out to the SC, while it had already given 180 days to several promoters after their initial default, barring two or three cases, none had been resolved. Indeed, with Credit Suisse data showing that the share of total debt that is held by companies that have an interest cover of less than one is still a high 42%, it is just a matter of time before NPAs start rising again, especially in sectors like telecom and power. Courts like the NCLAT and the SC need to understand the implications of their ruling.