Bad loans: SC has undermined RBI

The Supreme Court’s quashing of the February 12, 2018, circular of Reserve Bank of India (RBI) may be untenable in resolving contentious issue of stressed assets across textiles, shipping, sugar, power, transport and other sectors. The order adds to the confusion already reigning in the world of corporate finance, apart from further delaying the resolution of the Rs 10.8 lakh crore stressed assets that banks hold. Tuesday’s court order could bring insolvency and bankruptcy proceedings in many cases to a halt, heightening uncertainty over recoveries from dud assets. Also, the timing of the Supreme Court is significant given that the country is heading for a hard-fought Lok Sabha election beginning next week. With the election code of conduct in operation, the finance and power ministries can do little to instil confidence in stakeholders. Small investors and depositors who have parked meagre savings with state-run banks may be the losers, ending up with diminishing returns.

The Supreme Court is wrong to question the RBI’s authority over streamlining debt resolution in banks via the circular. In one go, the highest court has reduced RBI into a ‘Lilliputian organisation’ of little consequence. If not the RBI, who has the wherewithal, authority and locus standi to deal with companies’ defaults, build-up of banks’ stressed assets, protecting the integrity of the banking system? It’s like saying that the Supreme Court chief justice has very little say in running the country’s judicial system. While Finance Minister Arun Jaitley refused to join issue, the RBI is yet to come up with a future course of action. RBI Governor Shaktikanta Das may have to stand up, assert the RBI’s authority as banking sector regulator and provide clarity after the meeting of the Monetary Policy Committee on Thursday.

Resolving stress in about half a dozen corporate sectors within the timeframe of 180 days, with a 60-day grace period, through the NCLT process should be the starting point. Power companies cannot seek exemption from the NCLT and insolvency resolution process given their own chequered past. The promoters of companies, especially in the power sector, who owe the banks about Rs 2 lakh crore, may have to be kept under a tight leash before they take recourse to mismanagement and diversion of funds in the volatile market conditions after the Supreme Court order. One option could be to challenge the Supreme Court order that undermines the RBI’s powers to supervise and regulate the functioning of banks.