An apex court judgement that forces reflection on all sides

Source: By V. Anantha Nageswaran: Mint

The Supreme Court judgement on the circular issued by the Reserve Bank of India (RBI) on 12 February 2018 should be welcomed by all parties, including RBI. It enables all sides to reflect on the mistakes they made, and the steps that need to be taken to resolve the situation in a manner that facilitates not just the recovery of loans, but also economic growth, for the assets involved are mostly power generation assets.

In this newspaper, Mobis Philipose and Aparna Iyer wrote that the judgement was a healthy wake-up call for RBI. They call for better drafting of its circulars. One could add that the central bank should seek sound legal advice, too. In May 2017, when the government of India issued an ordinance to amend the Banking Regulation Act to insert sections 35AA and 35AB, I had written in a blog post (Thou shall fix banks, 6 May 2017) that the existing Section 35A conferred enough powers on RBI to issue directions to the bank, which included directing banks to refer non-performing assets (NPAs) to the insolvency and bankruptcy courts.

Quite why RBI was advised to request the government to issue that ordinance to amend the Banking Regulation Act when it already had sweeping powers is a mystery. It is a bit like this: “You are empowered to eat all the food in this restaurant. Upon my authorization, you shall be empowered to eat one masala dosa, too." First, in the presence of the first sentence, the second sentence is redundant. Second, what RBI had done is to eat too many masala dosas without authorization, and the Supreme Court has held it to be unconstitutional.

The judgement also highlights the redundancy of one of the recommendations of the Financial Sector Legislative Reforms Commission. This commission had recommended the formation of tribunals to hear appeals against decisions of the regulator. Many argued that India’s Constitution already provided for judicial review of the actions of all regulators with or without a special tribunal. The Supreme Court judgement has vindicated that argument. Redundancy has not been the sole prerogative of the central bank, even its baiters have been given to it.

Does the Supreme Court judgement represent a big setback to the country’s bankruptcy process? The initial reaction of many was that it was a big setback. But that has given way to more sober assessments that this is not so. In any case, this judgement is no more extreme than the court’s ruling that invalidated the constitution of the National Judicial Appointments Commission. The Supreme Court has simply ruled that the circular issued by RBI on 12 February 2018 is unconstitutional. RBI still has regulatory powers over banks and can issue directions to them. For example, RBI can ask them to make full provisions for NPAs 180 days into a default.

That would necessarily force banks to initiate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) to recover their dues. Whether such a specific directive would work or other ways exist to achieve the same outcome is not an area of expertise of yours truly, but the short point is that there are ways out.

In the last few months, especially after the previous RBI governor resigned for “personal reasons", many had openly expressed a fear that the government was assaulting institutions of governance. It may be recalled that the conflict between the government and RBI had started precisely after the issue of the said circular in February 2018. Now, the Supreme Court striking down the circular vindicates the government’s view that it was excessive use of force. So, here is an opportunity for critics of the government to reflect on their reflexive criticism of “bad politicians" riding roughshod over “good technocrats".

On its part, the government should acknowledge the intractable problem of power sector assets. The economic non-viability of state electricity boards and their inability to pay an economic price to power producers is a big part of the problem. There are also problems with availability of coal and delays in environmental clearances. Such delays can be attributed to the attitude of the judiciary, too. It will be increasingly difficult for India to sustain coal-based power plants given the global concerns over emissions and climate change. In such a milieu, if governments, acting as buyers, balk at paying reasonable prices for power, then the problem of non-performing power sector assets will keep arising time and again.

Finally, there is the all-important question of whether the government intended RBI to issue directions to banks in respect of each and every default separately, or intended to give the central bank a blanket or general authorization to issue directions to banks on the issue of defaults, because the 5 May 2017 notification of the ministry of finance conveys the latter impression. In sum, there has been sloppiness all around on such an important matter. That should worry Indians.