New Delhi/Mumbai: The Supreme Court (SC) on Tuesday asked the Reserve Bank of India (RBI) to furnish details of companies that have each defaulted on loans amounting to more than ₹ 500 crore in sealed covers within six weeks.
The court made the central bank a party “in public interest" in a 2003 case related to bad loans advanced to a few companies by the state-owned Housing and Urban Development Corp. Ltd. The case was filed by the Centre for Public Interest Litigation, an activist organization headed by Prashant Bhushan.
The order was passed by a bench comprising the Chief Justice of India, T.S. Thakur, and justices R. Banumathi and U.U. Lalit.
In its order, the court took note of an Indian Express report dated 9 February, which said that banks had written off more than ₹ 40,000 crore of loans in 2015.
The court also sought information on the debts that were restructured from RBI.
The Supreme Court’s request to RBI to release names of large defaulters comes against the backdrop of an elevated level of stressed assets in the system and concerns that banks have delayed the recognition of large bad loans in particular.
An RBI spokesperson did not respond to an e-mail seeking comment.
It isn’t clear how RBI will view the court’s action which, while supporting its own efforts to cleanse the banking system of bad loans, can also be construed as judicial overreach.
RBI governor Raghuram Rajan, in a speech in June 2014, had warned against excessive judicial oversight while speaking on the Financial Sector Legislative Reforms Commission’s (FSLRC’s) proposal to set up a Financial Sector Appellate Tribunal to review regulatory decisions.
“...a lot of regulatory action stems from the regulator exercising sound judgment based on years of experience. In doing so, it fills in the gaps in laws, contracts, and even regulations. Not everything the regulator does can be proven in a court of law," Rajan had said, adding that there were a range of decisions where regulatory judgment should not be second-guessed.
Indeed, RBI has, especially under Rajan, been at the forefront of the fight against bad loans and how banks try to hide them.
Blood on the books
RBI conducted an asset-quality review across the banking sector in October-December and asked banks to recognize visibly stressed assets as non-performing assets (NPAs) and provide for them. The impact of this was felt in the third quarter of the current fiscal.
Listed banks added nearly ₹ 1 trillion in bad loans in the December quarter, amounting to a 29% increase in the stock of gross NPAs from the September quarter. Gross NPAs of 39 listed banks surged to ₹ 4.38 trillion for the quarter ended 31 December 2015 from ₹ 3.4 trillion at the end of September, according to data collated by Capitaline.
Earlier, in its financial stability review, RBI had highlighted concerns over the credit quality of large borrowers.
Gross bad loans of large borrowers jumped from 6.1% in March 2015 to 8.1% in September 2015. The share of large borrowers in the overall gross bad debt of the banking sector also jumped from under 1% in March to 3.1% in September.
Restructured loans in the large corporate segment are at about 8.6% of total outstanding loans to the segment, RBI had said in its review.
The aggregate net profit of the 39 listed banks fell 98% to ₹ 307 crore in the December quarter from ₹ 16,806 crore in the year earlier.
The 24 public sector banks were the worst performers, having reported an aggregate loss of ₹ 10,911 crore in the December quarter compared with a profit of ₹ 6,970.8 crore in the year-ago quarter.
Some of these distressing trends are evident in the earnings of large lenders in the December quarter. For instance the country’s largest lender State Bank of India disclosed that large corporate NPAs contributed 11.2% of its gross NPAs at the end of the December quarter, compared with only 1% in the previous quarter.
ICICI Bank Ltd also said that a significant chunk of its slippages during the quarter came due to one large steel account. It declined to name the borrower.
Will transparency help?
The court has asked for names in a sealed envelope, but disclosing these names publicly would go a long way in improving transparency, said an analyst.
“I think it is a good idea to ask RBI to disclose the names of large defaulters. These names should be made public in the interest of greater transparency. RBI should be protecting depositors and they will be better informed if the names of defaulters are released," said Hemindra Hazari, an independent analyst and a long-time watcher of the banking sector.
The court observed that bad debts were plaguing public sector banks. It questioned the government on the status of loans advanced to companies. It noted that other economies have the experience of declaring loans becoming bad and NPAs.
The government, through solicitor general Ranjit Kumar, said that neither was it willing to give loans to defaulters nor was it in favour of waiving all loans.
According to a senior public sector banker, banks do provide information about defaulters and NPAs to RBI and hence the information is available with the central bank should it choose to disclose it.
When asked whether confidentiality agreements would come in the way of such a disclosure, the banker explained that loan agreements are governed by the Banking Regulation Act which provides for confidentiality, though it comes attached with conditions.
“There are always clauses which allow us to disclose details to the regulator or a judicial body," said the banker adding that he doesn’t believe such disclosures will have any significant impact on banks and their ability to conduct regular banking business.