RBI and the Insolvency Law

The Reserve Bank of India is the central monetary authority in India and is in charge of maintaining the economic stability of the country. They have various functions to perform. The most important role is to maintain the financial and economic stability of the economy. It is a fact well-known that the RBI enjoys extensive powers wherein it is able to supervise, regulate and control the commercial and cooperative banking systems. The Reserve Bank of India has exclusive powers which have been questioned with the Supreme Court’s decision to take away the central bank’s power of recommending defaulting companies to the insolvency tribunal.

As per the noticed issued by the RBI on the 12th of February, 2018, the RBI had replaced the various schemes of debt, completely restructuring it with one framework for the reliving of the assets. There were debts worth Rs 3.8 lakh crores which came under the Insolvency and Bankruptcy Code (IBC). This circular required all the banks in the country to implement a proper plan for a timely recovery of the debts or take assistance from the IBC. 180 days were given to the banks to implement the same. After the 180 days’ deadline given by the RBI, 150 insolvency cases have been filed. This was a powerful move which brought relief to the lenders who were trying to get their debts recovered. This law has been proved to be very successful in the past as huge amounts of money have been recovered successfully.

This law becomes important because if debts are not recovered on time then they would be classified as bad debts also known as non performing assets in the banking terms. When these increase, then it leads to a decrease in the investor’s confidence, thereby leading to a reduction in the investment levels in the country. It should be noted that for a developing economy like India, increasing investment is necessary for the overall growth of the economy.

However, the Supreme Court in its ruling has declared the whole circular as ultra wire. This means that all the actions taken by the creditors on the basis of this circular have to be revoked as well. Since the law has been revoked, now the negotiation of the debts can happen without the insolvency process.

There are two different lines of argument surrounding this. One is the perspective of the power associations and the other is that of the banking sector. The power associations argued in the court that this law led to an increase in the unemployment and GDP in the nation, because the debts had been taken back from the companies. This is seen to be a relief for all of these corporations, and many even perceive it to be a corporate friendly move favouring the industrialists. On the other hand, the banking sector is sure to suffer a loss because the debt recovery gets delayed.

The central bank of any nation is supposed to be the apex institution and if the credibility of the institution comes into question, then the impact can be felt on the nation as a whole. This is not the first instance. When Urjit Patel stepped down, this had diverted the nation’s attention to the issue of autonomy of the central bank. When the autonomy of the central bank of a nation comes into question, then it can have serious implications on the economy. One such macro impact can be that the investor’s confidence in the banking system gets affected in a negative way. It is important for the public to have confidence in the apex banking institution or else the faith in banking institution is lifted. Now, if the credibility comes into question again, then it becomes difficult to regain the nation’s and investor’s confidence in the central bank. The future course of action for the RBI can be that they are required to revise the laws which monitor the debt restructuring in the economy. One can only wait and see the counteracting move of the central bank to protect their autonomy and credibility in both the internal and the external environments.

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