Protecting depositors, taxpayers is public interest: RBI to Government

Amid speculation that the government may have invoked a hitherto unused section to overrule the Reserve Bank of India (RBI) on the pretext of "public interest", the central bank has shot back with its own definition of "public interest".

Reserve Bank Deputy Governor N.S. Vishwanathan, in a recent speech, said when a bank is trying to recover loans from borrowers, it is actually trying to get back depositors` money and it is not a case of "ruthless big bank" versus "hapless borrower".

"A correct portrayal of the situation would be: public interest (i.e. depositors and taxpayers) versus borrowers` interest," Vishwanathan said at XLRI Jamshedpur in a speech on October 29 that was posted on the bank`s website late on Friday.

It is speculated that the government, in certain cases where it differed with the bank, has invoked Section 7 of the RBI Act that empowers the government to consult the RBI Governor and direct the RBI to act on issues that it considers necessary in public interest.

One of the vexed issues between the two is related to RBI`s February 12 circular on stressed assets wherein the RBI has ordered banks to initiate bankruptcy proceedings against all large accounts above Rs 2,000 crore if a resolution plan was not met in 180 days.

Here, the government wants some relief for the stressed assets in the power sector, saying it is different from the other sectors as there are several external factors beyond the promoter`s control that turned it into a defaulter and should be given a special consideration.

However, the RBI maintains that the recognition of default or accounting for deterioration in the quality of asset should be independent of the reasons for such default or deterioration.

"The proponents of this line of thought argue that where the borrowers are affected by external factors beyond their control, they should be treated as `genuine` defaulters and some leniency in prudential norms is warranted. This is a fallacy," Vishwanathan said.

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"Another fallacy is the claim by the management of defaulting borrowers that the restructuring plan proposed by them will result in `zero haircut` for banks; whereas, if banks file insolvency application, new investor would be willing to take over the defaulting entities only with `huge haircuts` on debt," he said.

He explained that while payment offered by the existing management is usually spread over a long period, the new investors mostly come up with upfront cash payments and the choice before the banks is: `illusory future payments` versus `upfront real cash`.

Renegotiation of terms of a loan should be an exception rather than a rule, as resorting to it often would endanger the safety of deposits, dent a bank`s ability to lend further and imperil its existence, he said. 

He said the enactment of the Insolvency and Bankruptcy Code (IBC) is a watershed event that enabled RBI to come out with a revised framework for resolution of stressed assets.

"Banks are not supposed to be shock-absorbers of first resort of the difficulties faced by their borrowers as banks do not have the luxury of delaying payments to their depositors," he said.

Banks need to be exacting in their role as monitors of loans as it will force the borrowers to take up their case with their clients for timely realisation of their claims, he said. 

"Thus, the next time we hear about a bank making efforts to recover loans from borrowers, we should all note to remember that it is essentially trying to get back the depositors` money. 

Vishwanathan`s speech on RBI`s understanding of "public interest" came soon after another RBI Deputy Governor Viral Acharya warned the government of market`s wrath if it undermined the central bank`s autonomy in a speech in Mumbai on October 26. 

On October 31, the government came out with a statement saying it respects the autonomy for the central bank within the framework of the RBI Act. But it went on to say that "both the government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy".