RBI circular was to save PSU banks

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Updated: April 5, 2019 7:59:48 AM

Perhaps the Supreme Court should consider entertaining petitions to impose debilitating penalties on these arms. A 10% penalty per month on a SEB would surely ensure it paid all dues on time.

RBI, Supreme CourtThe Supreme Court Tuesday quashed the RBI circular of last year that pertains to the provisions for referring the defaulter to the National Company Law Tribunal (NCLT) even on a one-day overdue. (Reuters)

All those celebrating the Supreme Court (SC) striking down RBI’s February 12 circular are essentially arguing that since the government and/or the courts hit their business, why should the banks penalise them for this by trying to hand over their businesses to someone else via the Insolvency and Bankruptcy Code (IBC) route? In the case of the power sector, for instance, electricity boards owe private power plants `36,000 crore, including ‘regulatory dues’; similarly, a large gas-based power capacity is lying idle because of the policy change that denied them low-cost natural gas. In the case of roads, NHAI has pending arbitration cases running into tens of thousands of crore rupees; and the Supreme Court has worsened matters for another set of firms by cancelling their iron and coal blocks.

Second, they argue, even if there is a problem with the loans not being serviced, RBI cannot issue a ‘fatwa’, to quote a top industrialist, forcing banks to take the cases to the insolvency courts under the IBC law; let the banks decide on their own as in the past. Under the February 12 circular, if there is even a one-day default, this needs to be fixed and, if there is no solution in 180 days, the case automatically goes to the IBC.

It is not just industrialists, the government also seems to be of the same view. You would think it would be worried about the surge in NPAs of PSU banks and would be happy to see RBI pushing resolutions through the IBC; estimates are banks have got back `300,000 crore through IBC already. A seventh of all PSU bank loans till March 2018 were NPAs, up from 4.4% in March 2014; in absolute terms, the NPAs for PSU banks were `895,600 crore in March 2018 which is 85-90% of all NPAs. Yet, in SC, Solicitor General Tushar Mehta argued for not using the circular for all defaulters such as in the power sector. As he put it, “there ought to be a sector-wise contingency analysis by the RBI before exercising power” and that “so far as the power sector is concerned… RBI ought to have treated it differently from all other sectors in view of the steps that the Central government is taking in order to bring back the power sector on its feet”.

To understand this better, forget RBI and the banks, just assume individual A takes a Rs 100 crore loan from individual B for a project being done for the government. Is anyone, including SC, arguing that A doesn’t need to repay B if the government doesn’t pay A on time? Since the answer is no, surely this logic should apply to banks? Just because the government is the majority owner of most banks doesn’t make them a proxy for the government.
This is not to say the government doesn’t have to ensure its policy don’t hurt industry—as they clearly are in sugar and telecom —or that its arms like SEBs or NHAI don’t need to pay their dues on time. Of course it does. Perhaps the Supreme Court should consider entertaining petitions to impose debilitating penalties on these arms. A 10% penalty per month on a SEB would surely ensure it paid all dues on time.

Essentially, if a delayed government clearance or a bad policy is excuse enough not to repay loans (or salaries to workers?), no loans will ever get repaid. And while many have argued the February 12 circular is the surest way of ensuring that all industry shuts down, when banks don’t get their loans back in time, they stop lending and industry shuts down anyway. NPAs can surge again since all of telecom’s `325,000 crore of bank debt is to firms with an interest cover (IC) of less than one according to Credit Suisse; around 45% of the power sector’s `400,000 crore is to such firms, as is a large power of real estate’s `500,000 crore debt.

But what about the RBI’s fatwa, to get back to the earlier question, why should RBI tell banks what to do? Ideally, the regulator should just lay down guidelines for classifying loans and, if the banks don’t have enough capital since they need to provide against NPAs, they have a choice of going after defaulters (via IBC) or bringing in fresh capital while continuing to give defaulters time for God or the government to set policy right.

What complicates things, however, is the fact that public sector banks accounted for 66% of lending and 86% of NPAs in March 2018; it was a more equal 72% and 73%, respectively, in 2008. If RBI didn’t insist on a quick resolution, the political class could persuade banks to not pursue the defaulters with great vigour; the beauty of the February 12 circular was that it removed the bank’s discretion to go slow, it made this automatic. When NPAs balloon, the government has to bring in more capital to ensure the banks meet regulatory requirements. The problem, however, is that the government doesn’t have unlimited sums of capital to pump into banks, yet it is unwilling to let them freely tap markets for equity since this will result in de facto privatisation; nor is it clear that anyone would want to invest in banks with such high NPAs and bloated workforces. In other words, if RBI is issuing fatwas, it is to ensure the PSU-dominated banking system doesn’t collapse; if India didn’t have PSU banks, RBI wouldn’t need to come up with such a circular, it just needed to enforce its NPA-classifications. And in ensuring PSU banks took defaulters to IBC courts, RBI wasn’t just protecting the banking system, it was protecting the few crore honest taxpayers in the country since, ultimately, it is their taxes that recapitalise banks when industrialists don’t repay their loans.

Postscript: Instead of batting for defaulting promoters in sectors like power, the government would do well to fix its policies; and this mess wouldn’t have taken place if citizens—and courts—realised that in scrapping RBI’s circular, SC handed a huge bill to hapless taxpayers. RBI Governor Shaktikanta Das has said a solution is in the works; let’s hope it fixes the problem of defaulting promoters laughing all the way to the bank.

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