Serious setback (12-Feb 2018 RBI circular quashed)

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 Serious setback (12-Feb 2018 RBI circular quashed)

Read more on - Polity | Economy | Schemes | S&T | Environment


    • Debt resolution process gets a shock : The Supreme Court has quashed the RBI circular issued on 12-Feb. 2018 that forced Banks to recognise defaults by large borrowers with dues of over Rs.2000 crores within a day after an instalment fell due. The next 6 months were given for resolving the case, failing which it would be taken up under the IBC.  (Insolvency and Bankruptcy Code)
    • Stakes were high : The circular came in the backdrop of rising bad loans (10% of gross advances) and after many schemes had failed - corporate debt restructuring (CDR), stressed asset resolution, SSSSA (scheme for sustainable structuring of stressed assets) etc.
    • What was the aim : That circular wanted to break the banker-defaulter nexus, and stop evergreening of loans under various schemes. Credit discipline was created - recognise defaults immediately, resolve in 6 months, etc.
    • Impact was positive : Over few months, the circular had started making a big impact on resolution. Overall, more than Rs.3.8 lakh crores across 70 large borrowers was at stake.
    • A step backward : The SC quashing the circular risks hurting this credit discipline. For banks, it is "credit negative". The problem surely was that the circular treated all industries as same (one size fits all) and ignored specifics. It also did not appreciate that not all defaulters were deliberate - for example, the power sector firms.
    • RBI was unwilling to listen : If it had listened to some genuine grievances of certain sectors, then things may have been different today.
    • What should RBI do now :
      1. Be hard on credit discipline, do not relax
      2. Be like the bonds market (no leeway for borroweres in repayment) - so bank loans too should not
      3. Reframe guidelines to ensure that past one year's good work in debt resolution is not laid waste 
    • Summary : The Supreme Court's quashing of the Feb-12, 2018 directive of the RBI is a big shock, and the regulator has to quickly reframe guidelines to avoid credit discipline from slackening.
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                                                                                                                                                  PT's IAS Academy: Serious setback (12-Feb 2018 RBI circular quashed)
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