Supreme Court Vs RBI: Who is right on disclosing names of big loan defaulters? Answer is both

On Wednesday, in a sealed envelope, the Reserve Bank of India (RBI) submitted the list of big loan defaulters (companies with over Rs 500 crore bad loans) in the Supreme Court. The RBI did so after the apex court, on 16 February, demanded the list in connection with a PIL filed by Prashant Bhushan-headed NGO, Centre for Public Interest Litigation.

 Supreme Court Vs RBI: Who is right on disclosing names of big loan defaulters? Answer is both

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The SC, in February, had observed that ‘the RBI is supposed to uphold public interest and not the interest of individual banks,’ nor the central bank is in ‘any fiduciary relationship with any bank.’ But, while submitting the list, the RBI said disclosing the names in public would hamper the companies’ health if they are in genuine difficulty and ‘may accentuate the failure of business rather than nursing it back to health.’

This raises an important question: Who deserves RBI’s loyalty first--the common public or banks/big corporates? The answer is both and, largely, the former.

As the SC correctly observed, theoretically, the central bank ‘has no legal duty to maximise the benefit of any public sector or private sector bank, and thus there is no relationship of ‘trust’ between them.’ The central bank’s statutory duty is tilted towards upholding the interest of the public at large -- the depositors, the country’s economy and the banking sector -- and not a few large corporates who failed to pay back the money borrowed from banks. And hence naming the defaulters will in fact serve the interests of both the bank and the company. It is in this context that the SC says that the RBI ‘ought to act with transparency and not hide information that might embarrass individual banks’. But, the issue here is a bit more complicated than theory.

Wilful defaulters tableThe RBI is also tasked with the duty to ensure the business of banking runs under the principles of discipline and financial stability. The fact is that NPA (non-performing assets) is not a bad word always and it is dangerous to generalise all cases of NPAs. There are cases of where companies are unable to pay back their loans temporarily on account of genuine reasons such as industry slowdown, delay in government policy clearances and bureaucratic approvals. No matter what the reason is, banks classify loans into an NPA if interest payment is not received for 90 days.

In such cases, the repayment difficulty may be temporary and is repairable when market conditions improve and banks care to offer a bit of assistance through restructuring or fresh working capital funding. At this stage, if the names of these firms are made public, public image of these companies will take a severe beating, making it even more difficult for them to come out of the tough phase and, thus, further weakening chances of loan recovery for banks. The central bank’s reluctance to disclose the names of big defaulters is understandable since it is concerned about such cases.

But, there is absolutely no reason why banks keep the promise of confidentiality with respect to those promoters, who do not pay back even if they have the wherewithal to do so and the reasons of loan default aren’t genuine. These companies and promoters (called as wilful defaulters) do not deserve any mercy, such as the Kingfisher-Vijay Mallya case, where banks found evidences of fund diversion, mismanagement of funds loaned by banks and other charges related to financial irregularities. There is no reason for the RBI, banks or any authorities to keep their names hidden. Once banks identify these companies as wilful defaulters, they should be named and shamed in public at the earliest and the recovery process should be initiated.

Take the Mallya case for instance. The loan (about Rs 7000 crore then) turned bad in 2011-2012. But it took banks some four years to tag Mallya as wilful defaulter and initiate tough steps against the liquor-baron. Had this enthusiasm was shown in the early stage, things would not have turned worse to this extent (the total dues to over Rs 9000 crore, the value of underlying assets of Kingfisher has eroded sharply and the man himself is beyond the reach of banks and investigators in some foreign country). In Kingfisher-like cases, the general public (the taxpayer and the depositor) is fully within their rights to know about the default at the earliest.

Here, the task for the banks and the RBI is to distinguish the nature of default at the earliest with the help of forensic audits and seek the help of investigative agencies and sector regulators. Once a clear distinction is made, these defaulters should be named and shamed in public.

To be sure, already certain banks publish the names of wilful defaulters on their websites and through media. Credit bureaus such as CIBIL too publish the names of wilful defaulters. According to the Credit Information Bureau (India) Ltd, or CIBIL, 7,129 wilful defaulters owe India’s banks Rs 70,540 crores.

The point here is this: both the banking regulator and the apex court are right in their arguments on naming the defaulters. There is no second thought on the fact that public interest is paramount than commercial interest of institutions. But there is certainly a case to exercise caution and distinguish between the entrepreneur in genuine difficulty and a wily promoter who is making a mockery of the banking system.

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Updated Date: Mar 31, 2016 19:27:40 IST