PremiumThe Supreme Court’s attempts to resolve the stalled Amrapali housing project, in favour of hapless home-buyers, have inadvertently created a contentious hierarchy of rights and priorities. The case will set a precedent for the future of stressed assets in India and determine a pecking order for the rights of various institutions.
The Amrapali housing project, abandoned by original promoters, was entrusted to a consortium of seven banks for restructuring the loans, reviving the project and handing over finished apartments to prospective home-buyers, whose advance payments were diverted by the original promoters. In August, the Supreme Court asked seven banks – Bank of Baroda, Punjab National Bank, Punjab & Sind Bank, UCO Bank, State Bank of India, Indian Bank and Bank of India – to fund the project; the banks, in return, asked for regulatory forbearance on three counts: the project would be granted a priority sector status (which requires lower capital charge), loans to Amrapali project would continue to enjoy “standard" status even in the event of a default, and, there would be no external valuation of the project to assess viability.
The country’s central bank and banking regulator, the Reserve Bank of India (RBI), has objected to these conditions. RBI’s argument before the apex court is that the banks will be imperilling their depositors’ funds and therefore need to abide by the extant regulatory framework.
RBI does have a point. It is nobody’s argument that the dispossessed Amrapali project homebuyers should not get some legal support. But this assistance does create possible friction when it is at the cost of the trust that millions of deposit-holders have reposed in these seven banks. Any exception to that framework of trust immediately sends out a signal that cheated homebuyers have more rights than deposit-holders. This generates a bunch of political complications: it provides judicial sanction for bestowing differentiated rights on two different classes of economic agents, thereby making home buyers a superior political class by default. But, more importantly, it also erodes the trust that exists between a bank and its retail customers; eventually, it could impinge on the very foundation of banking.
Two other critical issues arise from the Supreme Court’s desire to deliver justice to the Amrapali project’s retail creditors.
The first is that any deviation from RBI’s existing prudential norms regarding income recognition, asset classification and capital adequacy is fraught with multiple dangers. The first two conditions put forward by the Amrapali consortium of banks demand exactly that. Granting the project a priority sector status (which is available only to “affordable" housing projects) and disregarding its interest payment defaults would trigger the classical “slippery slope" provision. It will open the floodgates: many other projects would immediately demand similar treatment, allowing many sticky assets to escape the category of a non-performing asset, thereby jeopardizing bank balance sheets and fostering once again a culture of wilful defaults.
The second issue is more structural.
There is no denying that defrauded homeowners, in and around the National Capital Region, have become a potent political class with sympathy for their situation touching a common chord among the middle class. Faced with this situation, banks have accorded priority to their owners – the government, which is eventually a political configuration – over the prudential norms spelt out by their regulator, RBI. The conditions spelt out by the consortium is a bluff that must be called, because it is predicated on the belief that the government will not let regulation interfere with future political dividends from sorting out the Amrapali mess.
There are also two lessons from the Amrapali saga.
One, the Supreme Court, on its part, must also realize that its activist verdict does have some unintended consequences, the most egregious of which could end up compromising the country’s banking regulations. Indeed, the court must aggressively pursue the trail of money diverted by the Amrapali promoters and, if the need arises, liquidate their personal assets to make good the shortfall in the project finances. That will ease some of the pressure on the state-owned banks.
Second, the RBI needs to be a bit nimbler, quicker on the draw. The central bank found it fit to respond to the court’s August 2021 order only in March 2022, a full seven months later. This creates the possibility of suspicion and reservations eclipsing the validity of RBI’s objections, or its true intentions as the country’s banking regulator.
