February 12: One year since the RBI reset bad loan rules

This practice has since alerted bankers if their borrowers have begun defaulting. Also, it has prevented borrowers from hoodwinking their bankers by borrowing from other banks to repay them.

So far so good. Most bankers and corporate honchos admit, albeit grudgingly that like the bankruptcy law, the February 12 circular has disciplined borrowers and seminally changed the balance of power in favour of lenders. But most bankers have more complaints rather than grudging praise for the circular because it doesn’t do much for quick resolution of bad loans.

The circular requires that the moment a loan is overdue, the bank in question must intimate the CRILC and go into a huddle with other lenders to initiate a restructuring of the loan so that it doesn’t slip further. As earlier, the loan remains standard for 90 days and then slips into NPA if dues aren’t paid.

But the problem lies with the restructuring rules. If the covenants of the loan are redrawn, or a new owner found, the borrowing company will remain an NPA unless all dues and 20 percent of the principal is repaid. Also, in the first place, the restructured loan must get an investment grade rating from at least two rating agencies.

Bankers point out that this is well-nigh impossible if a loan is stressed. As a result, most stressed loans become NPA, and once an NPA, it becomes almost untouchable for other banks, making the revival of the asset much more difficult. The suggestion, therefore, is that the requirement of investment grade from rating agencies be done away with. RBI and most banking regulators around the globe would call anything less, evergreening of loans rather than restructuring.

The second plaint is about restructuring plans that require 100 percent of the banks to approve the new package. Banks want the circular changed to say that 66 percent or 75 percent of lenders’ nod should suffice for a revamp plan.

RBI deputy governor N S Vishwanathan had clarified in a speech last year that the circular doesn’t require 100 percent lenders’ approval. But bankers say RBI is indulging in hairsplitting. In reality loan revamp plans have fallen through because of one or two dissenting lenders. May be, RBI can consider listening to bankers on the matter and tweaking the circular to say that 66 percent of lender approval should suffice for a revamp plan.

The bigger complaint and indeed attack has come against another part of the circular which required all existing stressed loans of over Rs 2,000 crore to be taken to the National Company Law Tribunal (NCLT) if not resolved in six months from the date of the circular.

Nearly 40 power companies, one sugar, one shipping and one defence company have challenged the circular in court. Their contention was that they were not willful defaulters. The government wasn’t keeping its part of the bargain.

Power companies, in particular, argued that if the public sector monopoly coal provider Coal India doesn’t sign fuel supply agreements, if monopoly purchasers of power, the state power distribution companies (discoms), don’t sign power purchase agreements, their power plants won’t be able to repay banks. Hence, RBI needs to distinguish between helpless power companies at the mercy of government monopolies and willful defaulters who siphon money. This argument strikes at the heart of the circular.

The root of the Indian bad loan problem has been a government and a system that doesn’t respect the sanctity of contracts. Beyond power, more generally in the economy, the biggest buyer of goods and services are central and state governments.

And both entities have a record of delaying payments. Their excellent example is followed by most of corporate India who merrily bullies those lower in the food chain. RBI, through this circular, was asking the sovereign and the heavyweights of corporate India to pay up on time.

In other words, RBI was saying that if governments and corporates don’t pay on time,  it can’t be the banking system’s responsibility to bear the loss and evergreen the loan. Instead, banks will give hell to the borrowers and thereby put pressure on governments to pay up.

But that wasn’t how it played out. The Supreme Court has stayed the application of the circular to power, shipping and sugar companies and the finance ministry is backing the companies.

The government actually believes companies that don’t repay their loans to banks may be excused if the cause of the delay is the government itself. Simply put the empire has struck back. RBI may not have yet lost because the apex court will start hearing pleas against the circular on February 19.

The country needs to realise that if RBI loses this case Indian banks lose and the Indian economy loses. The right answer would be for the government to recognise the importance of timely payment of dues. It ought to list all government entities on the TReDS exchange or the trade receivables e-discounting system which in turn will enable those who have dues to discount their bills on this exchange.

But instead of reforming errant governments and private companies, the sovereign has chosen to resist the RBI’s discipline. In fact, the centre went to the extent of using the never-before-used section 7 of the RBI act to force the central bank to back down on the matter.

In a sense, this seminal circular was perhaps partly responsible for the resignation of former RBI governor Urjit Patel. The new governor Shaktikanta Das has refused to change the circular.

In any case, the matter is subjudice and the apex court may well have the last word. In sum, the February 12 circular is historic and represents a valiant effort on the part of the central bank to reform India's banking system. History’s verdict may well be that the RBI had bitten off more than it was allowed to chew.