RBI: RBI’s still the headmaster of the class of defaulters – The Economic Times

Of course, there are power companies that are beyond revival because of inherent flaws and unviable funding structures.
So much has happened, but so little has changed.

After fighting the regulator for a year, some defaulters celebrated victory this week. But it looks like finance minister Arun Jaitley and the central bank have something else in mind.

Reserve Bank of India (RBI) Governor Shaktikanta Das was quite clear on where he stands on the banking clean-up – or the defaulters.

When the Supreme Court ruled ultra vires the RBI order that had directed banks to initiate insolvency proceedings in the absence of a resolution plan within 180 days, some interpreted it as no further muscular role for the central bank in directing banks to start insolvency proceedings.

Could RBI come up with an order under Section 35AA of the Banking Regulation Act unilaterally? The SC order says, no.

“The central government may, by order, authorise the Reserve Bank to issue directions to any banking company…’’ reads the Act. If the government joins hands with Mint Road, the latter can. That’s what seems to be happening with the Finance Minister saying that the ruling was more procedural.

For his part, Governor Das had this to say: The RBI stands committed to maintain and enhance the momentum of resolution of stressed assets and adherence to credit discipline. RBI will take necessary steps, including issuance of a revised circular, for expeditious and effective resolution of stressed assets.

So, both are on the same page.

One can reasonably assume that a substitute to the Feb. 12 circular would soon be in place. But one can’t hazard a guess on how soon, given that general elections are round the corner. The debate is about how tough it would be or how diluted.

The objective of the circular was to discipline and put the fear of bankers into unscrupulous promoters. That happened.

If the new circular has to have any semblance to the one that went behind, it has to retain the one-day default rule. This would prevent the companies with cash flow gaming the system by not paying banks on time even though they have the ability.

The plethora of restructuring schemes – such as CDR, S4A and SDR — should remain buried forever, with bankruptcy courts the only option to resolve defaults. If any of these come back, the IBC Act will be worth the paper it is written on.

The onus of identifying ‘incipient stress’ should be on the banks, and they must work out resolution plans.

The origin of the Feb. 12 circular was bankers’ reluctance to act quickly. Levy such a heavy penalty on banks for not following prudent banking, i.e., attempt early resolution in cases of stress.

Power companies may be partly justified in blaming the state distribution firms for their defaults. Just like the banking system, power generators should evolve too. File a suit against state-owned power distributors that don’t pay just like they would if a private distributor defaulted.

Of course, there are power companies that are beyond revival because of inherent flaws and unviable funding structures.

With this government investing large resources in making the bankruptcy law and the RBI looking for a substitute circular, last week’s victory may well be pyrrhic for those celebrating the apex court ruling.

via RBI: RBI’s still the headmaster of the class of defaulters – The Economic Times

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