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Points of conflict

Why has the Supreme Court given an ultimatum to the Reserve Bank of India on loan defaulters?

May 05, 2019 12:02 am | Updated 12:02 am IST

The story so far: On April 26, the Supreme Court directed the Reserve Bank of India (RBI) to disclose to the public the names of wilful defaulters on loans and also other information gathered by the central bank during its annual inspection of commercial banks. The RBI and the Supreme Court have been at loggerheads over this issue for a while now, with the central bank repeatedly refusing to obey the orders of the Supreme Court.

What did the RBI do?

In January 2016, the RBI refused to comply with demands made by activists under the Right to Information Act (RTI) to disclose copies of the annual inspection reports on banks such as the State Bank of India, Axis Bank, and ICICI Bank despite orders from the Supreme Court. The RBI also refused to provide information regarding the derivative losses suffered by banks and the fines imposed on banks by the RBI for violating various norms. The Supreme Court has this time around given the RBI a “last opportunity” to abide by its orders or face serious penal action. The disclosure of information about banks, however, is not the only point of conflict between two of the nation’s powerful institutions. In early April, the Supreme Court quashed the RBI’s circular issued on February 12, 2018 which directed banks to resolve their troubled loans within a period of 180 days. If banks failed to resolve their bad loans within the given deadline, the bad loan cases would be sent to bankruptcy courts.

Why does it matter?

The outcome of the battle between the RBI and the Supreme Court will determine the amount of information related to banks that will be made available to the public. Supporters of the Supreme Court’s position believe that greater transparency will allow the general public and investors in public and private sector banks to make better decisions with their money. In particular, they point to the problem of wilful defaults that has been plaguing banks. According to data gathered by TransUnion CIBIL, the amount of wilful defaults has risen by four times in the last five years from ₹39,504 crore at the end of March 2014 to ₹1,61,213 crore at the end of December 2018. At the same time, the number of wilful defaulters has doubled over the same period. State Bank of India, the largest public sector bank, has suffered the largest amount of wilful defaults among all banks.

The disclosure of the names of wilful defaulters to the public, many believe, will help bring about better credit discipline in the country by exposing problems brewing within banks sooner rather than later. In fact, they find it surprising that the RBI which has been spearheading the fight against bad loans is unwilling to release vital information on wilful defaulters to the public. The RBI, on its part, has argued that the disclosure of auditing information related to banks can lead to the exposure of sensitive information that may not be in the commercial interest of banks or even in the interest of the wider economy. The RBI also seems to believe that releasing information about defaulters can unfairly shame borrowers who may genuinely not be able to pay back their loans due to various financial difficulties. Such shaming could have the unintended consequence of impeding genuine business activity in the economy. The central bank has also put forward the argument that it has the fiduciary duty to protect certain information about banks.

What lies ahead?

It is hard to predict what will happen next in this battle. The Supreme Court may begin contempt proceedings against the RBI if it chooses to disobey its latest order, but the impact this will have on the RBI’s freedom remains to be seen. The RBI has chosen not to obey orders coming from the Supreme Court in the past, including previous proceedings of contempt against it. If the RBI is forced to abide by the Supreme Court order, it will certainly increase publicly available information on banks. Greater transparency will also help make the RBI more accountable. If there are legitimate reasons for banks and the RBI to withhold certain information from the public domain, however, the forced disclosure of information following the Supreme Court’s order may lead to various unintended consequences both within the financial sector and the broader economy. The RBI, for instance, may choose to not include in its annual inspection reports certain sensitive information about banks that it feels shouldn’t be in the public domain.

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