A fair settlement: On defaulters RBI prioritises public interest
Present circumstances:
- A strategy for how banks ought to deal with defaulters has been unveiled by the Reserve Bank of India.
- Because it deals with settlements with intentional and fraudulent defaulters, which some see as the RBI accepting their crimes, this circular has received a lot of backlash.
- However, this viewpoint is untrue. Instead, the circular aims to strengthen safeguards to guarantee that the public interest is protected when banks make such settlements.
Why there is even a problem. Why banks ought to cooperate with defaulters:
- In a situation of default, a bank’s main objective is to recover as much of the loan as they can. The bank may use a variety of strategies to collect the debt. The bank just relies on business judgements to determine which strategy will be most successful.
- For instance, the bank might want to assert its rights under the Insolvency and Bankruptcy Code (IBC, 2016) against the borrower.
- Or, in other cases, it can decide to go after a “compromise settlement,” in which the borrower and the bank come to an agreement on a settlement amount.
- As a result, it is false to assume that the RBI has approved something exceptional within the context of current circulation. The banking sector naturally includes one-time settlements. The RBI has only provided a formal regulatory framework for a widespread banking conduct.
In truth, some of these agreements might be with dishonest and willful defaulters:
- When attempting to recover a debt, a bank should not distinguish between intentional, fraudulent, or other defaults.
- It is up to the bank to decide whether a settlement is a better and speedier option than launching the IBC or choosing another course of action, regardless of the type of default.
- Such a decision should only be made in order to maximise recovery as quickly as possible. This will help free up banking capital that has been restricted by fraud or deliberate default.
Taking into account any potential crimes these defaulters may have committed:
- According to the RBI circular, banks have the right to file lawsuits against dishonest or deliberate defaulters.
- The statement makes a distinction between the criminality and the business aspect of a particular default case and states that financial settlements will be made “without prejudice to the criminal proceeding pending against such debtors.”
- In other words, the circular is not in favour of any illegal behaviour. But it shouldn’t be required to postpone business judgements in order to bring criminal proceedings against a defaulter. This distinction is significant.
Concerns about the banking sector stemming from the most recent circular:
- government control over the boards of public sector banks.
- As a result, there is a chance that the settlement process could be exploited to provide defaulters political clout at the expense of the banks’ financial interests.
- Since this concern may not be without foundation, the RBI must allow commercially rational decisions and prohibit those driven by political motivation.
It’s crucial to call attention to certain more pressing problems:
- Private sector banks have reportedly been negotiating with intentional defaulters for some time, according to a number of anecdotal reports.
- If banks have already been reaching these agreements and the RBI has issued them numerous directives to that effect over the years, one would wonder why this circular was necessary.
What should have been carried out to avoid criticism:
- Two-thirds of the Indian banking system is owned by the government, hence any acts performed by public sector banks are more likely to be looked into by governmental organisations.
- The RBI circular offers these institutions regulatory security for settlement-related actions.
- As a result, the circle only somewhat evens the playing field. The requirement for a circular, however, underscores the distortions that government-owned bank ownership in India has brought about in the banking industry when seen in a larger context.
- In a totally privately held banking system, such a circular would not have been required, and the ensuing debate could have been avoided.
- The administration of regulatory problems is the second main issue.
- A year ago, the RBI’s Regulations Review Authority 2.0 recommended that the RBI post all draughts instructions online for stakeholder input before finalising them after taking their opinions into account. An exception may only be made under unusual circumstances.
- Despite the fact that there were no issues with the company’s financial stability, adherence to fiduciary duties, or secrecy, this circular is nonetheless very significant to the general public since it has an impact on people who are the subject of ongoing criminal investigations.
- As a result, the drafted circular and a discussion paper describing its justification may have been placed for public opinion on the RBI website.
- The RBI would have had a chance to address any issues brought up by interested parties before notifying them by adding the appropriate clarifications to the drafted circular.
Conclusion:
- Given that banks are businesses, they should be able to operate as usual. Theoretically, it makes sense to separate criminal prosecution of willful defaulters from business choices like loan recovery.
- However, the situation in India has become excessively challenging due to government ownership of private businesses and gaps in regulatory control.
- Future public debates should centre on these fundamental issues rather than potential moral policing actions by banks or the RBI.
