Setback for resolving bank NPA issue


By DM Deshpande

The Supreme Court dealt a body blow to efforts of RBI to reign in NPA’s of banks. In a February 2018 circular the RBI had mandated banks classify loans of Rs 2,000 crores and above as ‘stressed’ if their repayment remained overdue even for a single day.Thereafter a window of 180 days would open during which the lenders and the borrower have to agree upon a plan to resolve the default. If the non-payment problem persists beyond 180 days, then the lenders would get a free hand to take over the firm, sell the firm or liquidate it under the IBC (Insolvency and Bankruptcy Code).

The 2018 order of the RBI needs to be put in perspective. The banking sector NPAs have grown at a startling pace despite the massive cleaning up efforts since 2015. Several banks have habitually tried to push the problem of NPA’s under the carpet. The cycle of NPA’s being restructured on one or the other pretext was becoming very common. The ‘ever-greening’ of loans harmed the credit culture and threatened to strike at the very roots and the foundation of banking industry. The RBI took drastic measures by scrapping all schemes such as CDR, SDR, S4A or 5/25 and ordained commercial banks to hasten the process of loan resolution.

Notwithstanding the highest court’s diktat, the individual banks could still proceed against big defaulters on case to case basis on merit. But the past experience of individual banks to pro-actively go after big defaulters is hardly encouraging given that most of the times it involves taking a haircut, a big one in most cases.  That is why, the RBI, both as a regulator and custodian of the health of banking industry, took upon itself the responsibility to tame the defaulters. Now, the Supreme Court verdict puts paid to all those strenuous efforts of RBI.

The 2018 order of the RBI was contested by quite a few defaulters. Some said that they are the victims of ‘state policies’ and they should not be penalized for no fault of theirs. Electricity companies have pointed out that but for the huge outstanding dues from the state governments, their financial position would have been drastically different. Several states have been giving out electricity for free or at ridiculously low rates. As result, power distribution utilities have not been able to clear their dues to producers. Ditto with sugar companies, freebies are offered by politicians and someone else will foot the bill!

The Allahabad High Court had denied interim relief to power companies. It had opined that the RBI holds a position of pre-eminence as a regulator of banking industry. It had also pointed out that the government too had amended the Section 35A with an intention of giving freedom to RBI to deal with stressed assets.

The Supreme Court has set aside the order of RBI holding it ‘ultra vires’ or beyond the legal ambit of RBI. The Court ruled that resolution under IBC Code could be invoked only under Section 35AA and it requires the prior authorization of the central government. Again, the court held the view that directions could be issued in respect of specific defaulter and specific case and not generally to all defaulting debtors under section 35AA.

The government claims that it is instrumental in heralding a new credit culture. That the lenders no longer need to chase defaulters. In that case, IBC reform should not be held to ransom or become another cause for friction between the government and the RBI. It is possible to amend the law in keeping with the verdict of the highest court and also give the RBI autonomy it needs to set the banking house in order. In power sector alone 34 defaulters owe over Rs two lakh crore in debts. The RBI order did trigger quicker repayments as otherwise promoters risked terminal action under IBC. What is needed is a fair set of rules and autonomy to RBI or the problem of NPA’s will not only worsen but will have a huge negative impact on the entire economy.


The writer is in the field of higher education- teaching, research and administration for nearly four decades. Presently he is the Vice Chancellor of ISBM University, Chattisgarh.