India’s state-owned banks are often caught between a rock and a hard place: there is the sovereign or the government which controls these banks with their dominant shareholding, and the banking regulator, the Reserve Bank of India (RBI), rolling out rules or nudging them to meet objectives that can very often be conflicting.
The latest such instance appears to be an attempt by the government to rein in banks from going in for compromise settlements with borrowers or technical write-offs in the case of loan accounts classified as wilful defaults or frauds.
A report in the Financial Express says that the finance ministry and the Insolvency and Bankruptcy Board of India (IBBI) want banks to exercise restraint while undertaking compromise settlements or technical write-offs for accounts classified as wilful defaults or frauds. The report says that officials in the finance ministry are of the view that such a process could delay recovery of the loan or debt under the Insolvency law, leading to a further erosion of assets. Rather, the ministry would prefer banks launching proceedings under the insolvency law promptly.
If these reported attempts are indeed true, that would be unfair. Not just to the overall sense of commercial judgement of many bankers but also to the banking regulator which in June this year released a new set of rules to guide banks on handling negotiated settlements with borrowers in the case of wilful defaults and defraud.
The June 2023 RBI circular on this says that such settlements have to be under a board-approved policy of the bank with reasonable thresholds and timelines and provisions related to permissible compromises to maximise recovery of proceeds. It also clearly specifies that any such negotiated deals should be approved by a judicial forum if there is any dispute pending.
Further, the rules also make it clear that any such settlement should be without any prejudice to future contingent contracts and to any pending criminal proceedings against borrowers. It also keeps out officials who had originally sanctioned loans from this settlement. There is also a cooling period of a minimum of 12 months after the negotiated settlement before the borrower can approach the lender again.
The RBI is right when it says that the primary objective of this rule change is to enable banks to tap multiple avenues to recover money from borrowers in default without much delay. Sure there is the option of the IBC or the insolvency law for banks to exercise. However, data from the IBBI itself shows that the average time taken for a closure is now over 800 days compared to the original aim of 270 days with recovery proceeds after the sale of assets also fairly low.
It would therefore make sense for lenders and borrowers to possibly go in for settlements early before reaching the National Company Law Tribunal (NCLT) with the prospects of erosion of the value of the assets if the case drags on or losing control of the company which is inevitable. That should be the disincentive for both. What is left of an insolvent company at the end of 800 days if you come to think of it!
It takes years after each cycle of an overhang of bad loans – that has recurred every 10 years in India in the last three decades – to clean up the balance sheets of banks entailing in the process of huge infusion of capital, which is a huge charge on public money in the case of public sector banks. Last fiscal, Indian banks reported one of the lowest levels of bad loans in years with collective profits of well over ₹2 lakh crore reflecting also the aggressive efforts mounted by them in the recovery of loans. It is also true that the IBC has helped over time given the recognition by many borrowers of the weakening of their terms of negotiation compared to the past.
For the government, it would be better to expend more of its energies on bolstering the insolvency law to plug gaps to prevent possible gaming of its provisions by vested interests and to ensure greater autonomy for state-owned banks and their professionalization. There cannot be a more opportune time than now given the current healthy balance sheets of Indian banks.
Ideally, the RBI and government should work closely on this. For instance, the RBI’s circular had come out only as late as June this year and now the government, if the reports are correct, seeks to dilute the very objective of the RBI’s rules as stated in this circular.
