The Supreme Court has erred in quashing the controversial February 12 RBI circular that imposed stringent conditions on lenders on loan repayments. It was meant to make the credit system work well, by operationalising the bankruptcy code, a crucial legislation to resolve corporate distress and bring discipline among borrowers who game the system. That has got a set-back now.
Needless to say, SCs ruling will bring cheer to the industry that was howling in protest against the RBI directive which said that a loan must be declared stressed if its servicing is overdue by a day. And if a resolution is not arrived within 180 days — of a loan of Rs 2000 crore or more turning sticky — the lender should refer it to the bankruptcy court.
Power companies led the protest, challenging the circular in various high courts, arguing that they cannot be treated at par with other sectors due to the peculiar nature of their problems that were beyond their control such as non- availability of fuel and cancellation of power blocks.
The special case of power warrants special action within the insolvency and bankruptcy code, but not diluting banking discipline. Buy-out funds set up by banks, for example, can acquire these stressed assets and sell them later.
Today, the power sector is in a huge mess due to the lack of will among politicians to make consumers pay for the power they consume and resources to compensate utilities for the subsidy they are pushed to give certain sets of consumers. Putting together patient capital to buy out the assets and hold on to them till the political resolve to fix power materialises is the solution.
In short, the SC should have left prudential regulation to the RBI.