THE GIST of Editorial for UPSC Exams : 04 APRIL 2019 (Serious setback: on SC setting aside RBI's ‘Feb. 12 circular’ (The Hindu)

Serious setback: on SC setting aside RBI's ‘Feb. 12 circular’ (The Hindu)

Mains Paper 2: Economy
Prelims level: Feb. 12 circular
Mains level: Economic growth and development

Context

•  The Supreme Court order quashing a circular issued by the RBI on resolution of bad loans is a setback to the evolving process for debt resolution.
•  The voiding of the February 12, 2018 circular could slow down and complicate the resolution process for loans aggregating to as much as ₹3.80 lakh crore across 70 large borrowers, according to data from the ratings agency ICRA.
•  The circular had forced banks to recognise defaults by large borrowers with dues of over ₹2,000 crore within a day after an instalment fell due; and if not resolved within six months after that, they had no choice but to refer these accounts for resolution under the Insolvency and Bankruptcy Code.
•  Mounting bad loans, which crossed 10% of all advances at that point, and the failure of existing schemes such as corporate debt restructuring, stressed asset resolution and the Scheme for Sustainable Structuring of Stressed Assets (S4A) to make a dent in resolving them formed the backdrop to this directive.

Aim behind this circular

•  The circular was aimed at breaking the nexus between banks and defaulters, both of whom were content to evergreen loans under available schemes.
•  It introduced a certain credit discipline banks had to recognise defaults immediately and attempt resolution within a six-month timeframe,
•  The borrowers risked being dragged into the insolvency process and losing control of their enterprises if they did not regularise their accounts.
•  RBI data prove the circular had begun to impact resolution positively.
•  It is this credit discipline that risks being compromised now.
•  It is not surprising that international ratings agency Moody’s has termed the development as “credit negative” for banks.
•  It is true that the circular failed to take into account the peculiarities of specific industries or borrowers and came up with a one-size-fits-all approach. It is also true that not all borrowers were deliberate defaulters, and sectors such as power were laid low by externalities beyond the control of borrowers.

Way forward

•  The RBI could have addressed these concerns when banks and borrowers from these sectors brought these issues to its notice.
•  By taking a hard line and refusing to heed representations, the RBI may only have harmed its own well-intentioned move.
•  That said, it is now important for the central bank to ensure that the discipline in the system does not slacken.
•  The bond market does not allow any leeway to borrowers in repayment, and there is no reason why bank loans should be any different.
•  The RBI should study the judgment closely, and quickly reframe its guidelines so that they are within the framework of the powers available to it under the law.
•  Else, the good work done in debt resolution in the last one year will be undone.

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Prelims Questions:

Q.1) Recently India signed COMCASA agreement. What is the benefit for signing this agreement?
A. India will automatically become member of NSG.
B. India will automatically become member of UNSC.
C. It allows India to procure transfer specialized equipment for encrypted communications for US origin.
D. It allows India to procure transfer specialized equipment for encrypted communications for Russia origin.

Answer: C

Mains Questions:
Q.1) Quashing of the ‘February 12 circular’ could undo credit discipline in the banking system. Explain.