Former Reserve Bank of India Governor Urjit Patel has heavily criticised the government for diluting the Insolvency and Bankruptcy Code (IBC) and the powers of the central bank, saying this undermined efforts made since 2014 to clean up the bad loan mess.
In his new book Overdraft: Saving the Indian Saver, Patel has said that the Supreme Court’s April 2019 verdict had not found the RBI’s February 2018 one-day default regulation on the insolvency process “problematic” – however, the subsequent (June 7, 2019) circular issued by the central bank had diluted this aspect, making the insolvency regime “vulnerable and brittle”.
It had also delayed the process, helping many defaulters escape the bankruptcy court. The February 2018 circular, issued when Patel was Governor, had forced banks to classify borrowers as defaulters immediately, and had brought several large defaulters to the National Company Law Tribunal (NCLT).
Patel quit in December 2018 following a clash with the government.
“Lawyers who had agreed to represent the RBI in the Supreme Court (SC) dropped out at the eleventh hour, literally the night before the hearing,” Patel has written. “Striking down the February 2018 circular has made the insolvency regime vulnerable, possibly brittle.”
On his rift with the government, Patel has written that its disposition towards the IBC “perceptibly changed” in mid-2018 – instead of buttressing and future-proofing the gains that had been made, an atmosphere of going easy on the pedal ensued.
“Until then, for the most part, the finance minister and I were on the same page, with frequent conversations on enhancing the landmark legislation’s operational efficiency,” says the book. “There were requests for rolling back the February circular. A canard was spread that MSMEs would especially suffer, when, in fact, the previous dispensations for this class of borrowers had been explicitly protected in the new regulations.”
The asset quality review initiated by the RBI in 2015, when Raghuram Rajan was Governor, had revealed huge under-reporting and ever-greening of non-performing assets (NPAs). The recovery under IBC, however, slowed down since 2019. “We didn’t have to wait long for the camel’s nose to appear under the tent,” Patel has written.
The regulator’s de facto powers have been diluted on several subjects related to preserving financial stability, Patel has said. “Circulars were reversed and the PCA framework essentially ditched as these came in the way of stimulating the economy through higher credit growth.”
Various innovative “smoke-and-mirrors” schemes had been hatched, Patel has said. In 2019, government-owned LIC and State Bank of India (SBI) were directed by the Finance Ministry to “pony up” Rs 15,000 crore for a fund to provide financing to already over-leveraged, problematic real estate projects that were ‘close to completion’. The government also agreed to underwrite 10 per cent of banks’ purchase of up to Rs 1 lakh crore of NBFC debt. “Surely, this does not de-risk matters,” says the book.
According to Patel, the government uses “ownership of banks as a means for day-to-day macroeconomic management rather than primarily for efficient intermediation between savers and borrowers”. Even after three decades of banking sector reforms, including the entry of private banks, “state-sponsored credit creation” retains a majority share, he has said.
The government “encouraged GBs (government banks) to help stimulate the economy for higher growth under the guise of ‘capital deepening’, ‘sensitive’ sectors (for example, real estate/construction)”, Patel has said. This leads to higher NPAs over time, which requires equity infusion from the government – and this eventually adds to the fiscal deficit and sovereign liabilities, says the book.
The book does not mention the demonetisation of Rs 500 and Rs 1000 notes that happened soon after he took over as RBI Governor in September 2016. Patel was chosen to lead the central bank after his predecessor, Rajan, was denied a second term.