Getting the regulator to clean up the banks’ mess
Latest News »
- Day before Nandyal bypoll, TDP and YSR Congress file complaints against each other
- RBI hikes foreign investment limit in Eris Lifesciences to 49%
- Retiring L&T executive chairman A.M. Naik to get Rs32.21crore leave encashment
- Pakistan stocks enter bear market after political turmoil
- In his last L&T AGM, A.M. Naik says firm’s focus to remain on defence, infra sectors
There is plenty of scepticism on how the new ordinance to empower the Reserve Bank of India (RBI) to tackle the colossal bad loan problem will play out.
On the surface, the amendment seems to give enormous powers to the RBI as the central bank can now dictate all commercial decisions linked to bad assets of a bank.
But dig a little deeper and there appears to be a larger flip side to this empowerment.
Firstly, what is the new ordinance?
The new ordinance passed by the government will amend the Banking Regulations Act in order to give more power to the central bank in bad loan resolution.
The amendment inserts two sub sections to Section 35 that will enable the RBI to issue any directive to banks in specific borrower cases to speed up the resolution process. It also gives power to the government to authorize RBI to tell banks to begin insolvency procedures against defaulting companies on a case-by-case basis. Until now, under Section 35, the RBI had powers to only supervise bank books.
The ordinance puts the onus of how a bad loan is resolved on the RBI. A banker can always point his finger towards the RBI if questioned on the way a bad asset has been resolved. Commercial decisions of banks will now bear the colours of regulatory approval.
Does this give bankers immunity from investigative agencies? To some extent, it does. Enquiries post facto will always end up at the RBI’s door. A banker can always say that the haircut agreed to was in accordance with the RBI’s directive.
This ties the RBI’s credibility to how it steers banks’ steps towards bad loan resolution. There is no precedent to this kind of responsibility, although India did have a framework wherein the RBI used to vet commercial decisions of banks decades ago. At a time when the central bank is still smarting from a blow to its credibility in the aftermath of demonetization, taking on the risk at the banking regulation level seems fraught with problems.
Now, look closely at the language of the amendment. The government has to authorize RBI for triggering the insolvency code. Further, the RBI’s oversight will be on a case-to-case basis. This leaves many unanswered questions. Will company X get the same scrutiny as company Y? Who qualifies for insolvency? What’s more, with the government stepping in, there doesn’t seem to be full autonomy to the RBI.
While the fear of insolvency could instil discipline into errant borrowers, the responsibility of bringing defaulters to book is an unnecessary headache that the RBI can avoid.
After all, the best form of resolution is when both the parties agree on the value of the asset. And a regulator can hardly add anything to a commercial transaction.