Everyone is scared of someone. Bankers are reluctant to lend. The regulator is unwilling to relax the rules. The minister is hesitant to tell the regulator to change the rules. And babus, who advise the ministers, find it too hot to handle. All are praying for the court to kick the can so that they are not roasted and ridiculed by the Opposition before 2019, or years later pulled out of retirement and put through a Spanish Inquisition by another government.
The protagonists, opponents, and the actors with bit parts are all caught in this milieu as a highstake court drama unfolds — first, in the Allahabad High Court, a theatre of many famous feuds, and now in the Supreme Court — over 30-odd power companies, saddled with a combined debt of more than Rs 1.5 lakh crore.
After missing the August 27 deadline, banks have a fortnight-long window to resolve the debts — which would mean calculating the slice of debt that is ‘sustainable’ and can be serviced by the borrowing power companies, and converting (rather, forgetting) the balance ‘unsustainable’ part.
A fortnight may be too short a time for doing the arithmetic and convincing stakeholders. Bankers will not rush through — by now, they know the price they may have to pay for such ‘undue hurry’. RBI officials will not tweak the rules that are now engraved in the February 12th directive (which requires banks to begin the bankruptcy process if they fail to resolve NPAs by August 27). They fear someday they could be summoned by the Central Bureau of Investigation — just as their colleagues were questioned by the agency for modifying a circular seven years ago that gave a second chance to a troubled airline called Kingfisher. (What RBI merely did then was to extend the easier loan restructuring framework that was till then applicable for NPAs of manufacturing companies to services like airlines).
This time, RBI has put its cards on the table of the Allahabad High Court: it’s categorical that rules of the February circular will be slacked only if the government (the owner) directs it. While Demonetisation had demonstrated that RBI does cave in to New Delhi’s pressure, all such ‘persuasions’ have to happen before the rules are announced and matters boil over to the court. Now, it’s too late for RBI to budge.
Any discussions on whether the government would invoke Section 7 of the RBI Act, which empowers the former to direct the banking regulator, is academic. Has it ever been used? Perhaps, the section had a significance before 1949 when RBI was a company with private shareholders who could go against the government; it was well before monetary authorities had the aura they later acquired and the idea of the central bank’s autonomy captured the imagination of the liberal world. In today’s time, invoking Section7 would be perceived as openly belittling RBI’s authority.
Neither can the government afford such an undisguised step to force RBI nor can it furtively attempt to influence Mint Street in reviewing a directive that would give defaulting business houses a lifeline. It surely doesn’t want a lately-eloquent Rahul Gandhi to once again toss the ‘suit-boot-ki-sarkar’ jibe in the run-up to the state elections. It’s hard to digest that finance ministry was oblivious to the RBI circular while it was in the works, though it’s entirely plausible that men deputed by the ministry to discuss the subject had failed to grasp its wide ramifications.
When they finally did, the bullet had left the gun barrel, and there was no going back for RBI. A government that pursues reforms on war-footing, and actually believes that the style of functioning that prevailed for the past 60 years can only be changed through shock therapies, must be ready to bear the cost of harsh reforms. If a number of these NPAs (not just of power companies) land up before the bankruptcy court — and chances are they could —, bankers might not lose their jobs but it could mean annoying litigations and distress sale of assets as well as huge haircuts, losses, and erosion of capital of banks.
And when that happens, the finance minister of the day, should be ready with the cheque book to bring weary lenders back on their feet. If the apex court upholds the RBI directive, the financial consequences that comes with a bad handling of a difficult problem will have to be borne. It won’t be easy. Someone may have to pay the price. The coming months could unravel whether the power NPA mess would claim a scapegoat and who that would be!