It is welcome that the RBI governor, Shaktikanta Das, has chosen to stand by the controversial February 12 circular of the banking regulator, which elicited howls of protest from industry and crooning sympathy from the banks themselves, and is under challenge in the Supreme Court. It is imperative that the court leave prudential regulation to the RBI and stick to matters of legality, if any, in the issuance of the circular. For the credit system to work well, the country needs the Insolvency and Bankruptcy Code (IBC) and February 12, 2018, circular that operationalises it.
The circular says two things. One, a loan should be declared stressed if its servicing is overdue by one day. Two, if, within 180 days of a loan of Rs 2,000 crore or more turning non-performing, if its resolution is not complete as per a plan the lender is obliged to put in place for every loan, it should be referred to the bankruptcy court under IBC. How can a loan be classified as stressed for default of just one day? The question can be put to any deadline.
Suppose there is a grace period of one month. At the expiry of that month, how can the loan be declared stressed if servicing is delayed by one extra day? It is best to recognise a problem early on and give the borrower the chance to repay it within six months. The fear of being taken to bankruptcy court is proving to be necessary and sufficient for a whole lot of borrowers to ditch the old mindset that repayment of large loans is the banks’ problem. It would be wrong to kill this incipient banking discipline by extending either of the two deadlines in the February 12 circular, whatever the protest.
A special class of bad assets is power. The sector is in a mess because politicians lack the will to ask consumers to pay for the power they consume as well as the resources to compensate utilities for the subsidy they are forced to give certain sets of consumers. The solution is to put together patient capital to buy out the assets and hold on to them till the political resolve to fix power materialises, not to let sickness in power infect banking. This capital can come from the banks themselves, for future upside.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
via In defence of RBI’s February 12 circular