In 2015, the Supreme Court [SC] had held that the Reserve Bank of India [RBI] cannot withhold information on defaulters and other issues covered under the RTI [Right to Information] Act under the “guise” of confidence or trust with financial institutions [FIs] and is accountable to provide information sought by general public.
The apex court had opined that the banking regulator was duty bound to furnish all information relating to its annual inspection report [AIR] on banks and other material under the RTI Act unless the material is exempted from disclosure under the law. It had also ordered that RBI should take rigid action against those banks and FIs indulging in “disreputable business practices”.
Yet, under its “Disclosure Policy” [it lists certain information as being exempted from being disclosed under the RTI Act], the RBI continues to withhold names of willful defaulters and NPAs of banks on the ground of protecting the economic interest of the country as well as its fiduciary relationship with the banks [it argued AIR contained “fiduciary” information as defined under the RTI Act].
The banking regulator had further contended that ‘disclosure of such information may create unwarranted panic and lead to public rushing to the banks’.
In January, 2019, the SC had issued a contempt notice to the RBI for not complying with its orders. Even thereafter, since the orders were not complied with, the matter came up for hearing on April 26, 2019. This time, the top court gave a “last opportunity” to the banking regulator to comply with the law but warned that any further violation shall be viewed seriously.
While, the law will take its own course, the stance taken by the RBI has far reaching ramifications which require a close look. The three major planks on which the banking regulator has based its stance are ‘economic interest’, ‘unwarranted panic and public rushing to the banks’ and ‘fiduciary relationship with the banks’. On all the three counts its position is untenable.
The banks play a vital role in economic development of the country. As major financial intermediaries, they collect money from the general public and lend to industries and businesses to support latter’s need for investment and other funding requirements. Their main source of income is the excess of the interest charged on funds lent to borrowers over the interest paid on deposits taken from the public/investors.
They have to be vigilant enough to ensure that the borrowers use the money for the purpose it has been lent; that the latter generate sufficient cash from their business operations to be able to pay back loan amount along with interest thereof and that no installment of the principal or interest is kept pending vis-à-vis the agreed schedule. In short, there must not be any default at any point of time.
There could be situations of default because of genuine reasons/factors beyond the control of the borrower say, economic downturn due to sudden plunge in demand or excessive import affecting domestic industries etc. In such cases, the RBI may be justified in holding back the information as disclosure could erode shareholders’ wealth and jeopardize the chances of reviving the business.
However, a borrower deciding not to pay back willfully is a dangerous thing to happen. He/she won’t pay back the loan – even if the underlying business environment is favorable and has enough cash to service it. Since, huge public money is involved, the general public has every right to know details about the willful defaulters. Disclosure of this information will be in the overarching public interest.
Far from hurting economic interest – as apprehended by the RBI – this will be helpful. For someone who had diverted the borrowed funds to avenues other than the purpose for which these were taken [say, to his/her shell companies or building personal assets] and has no intention of returning the money, ‘naming and shaming’ along with legal steps is the only way forward.
As regards, ‘unwarranted panic …………’, this apprehension is totally unwarranted and uncalled for. A panic situation is created only when the bank’s capital is eroded to a point whereby it is not in a position to redeem its liabilities prompting the depositors to line up before the bank manager for return of his/her money. True, the NPAs had increased leaps and bounds during the three years ending March 31, 2018 [thereafter, these are on a downward trajectory] but these were nowhere near a level so as to cause panic.
Even so, RBI’s sticking to its stance of not disclosing the list of defaulters [albeit willful] has no link whatsoever to an assumed panic/emergency scenario. Yet, an attempt to hide the identity of the defaulter on the pretext of creating a panic situation will only be counter-productive as this will dilute focus on efforts to recover the money from such defaulters.
Furthermore, the status of NPAs – bank-wise as well as for defaulter-borrowers – is already in public domain [courtesy, proceedings under Insolvency and Bankruptcy Code (IBC)] and disclosure of the names of willful defaulters, quantum owed and action taken by the RBI is unlikely to cause any negative effect on the public perception of bank’s health and economy’s perspective.
Finally, the invocation of ‘fiduciary relationship with the banks’ is an absolutely untenable argument. Upholding trust between two contracting parties [read: the lender/bank and the borrower] can’t be a one-way affair. When, the borrower brazenly violates the very core of the agreement by not paying back the dues, to expect the bank not even disclose his/her identity is patently absurd.
To conclude, all arguments given by RBI for not disclosing the information about willful defaulters are illogical and untenable. No wonder, the apex court has given strict orders for disclosure of all information pertaining to them. The banking regulator should comply without any further delay.