As questions abound over how Reserve Bank deals with bad loans, it denies information under RTI

The Reserve Bank of India has refused to share information under the Right to Information Act on its internal panel that advises it on the resolution of large corporate bad loans. Responding to Scroll.in’s right to information application seeking details of the number of meetings held by the Internal Advisory Committee since its inception in June as well as the minutes and resolutions of those meetings, the central bank denied access to the information, claiming it would be a breach of fiduciary relationships (trust-based ties between financial entities and their clients).

Scroll.in had filed the application on June 25, shortly after the Reserve Bank’s Internal Advisory Committee referred 12 big defaulting loan accounts for insolvency (bankruptcy) proceedings after banks had failed to recover money from them. On Monday, the committee released a list of 26 companies that had defaulted on loan payments and asked banks to start the process of recovering the money through various debt resolution options. The Reserve Bank did not name these companies.

The Reserve Bank’s denial of information – conveyed in its response to Scroll.in on August 4 – on the grounds that it could hurt fiduciary relationships is not new. It had earlier declined sharing even selective portions of the minutes of its board meetings. And in 2015, it had refused to disclose the names of loan defaulters despite the Supreme Court’s suggestion that it do so in public interest as the matter involved taxpayers’ money. At the moment, the names of only those defaulters against whom banks have filed cases for recovery have been put out.

This secrecy has led to allegations of the central bank being selective about the loan defaulters it is going after. In the monsoon session of Parliament that ended on August 11, Lok Sabha MP NK Premachandran questioned the workings of the panel and asked why the Reserve Bank had chosen only 12 loan accounts for speedy resolution.

In response, Finance Minister Arun Jaitley said people should have faith in the central bank’s decisions. “What is the criteria on which they will exercise? Let us have faith in RBI,” he said. “Shri Premachandran was asking what is the criteria and why have you selected me and not somebody else. People challenge this power exercised by the RBI in courts also. But let me tell you that nobody can claim a right of equality in the matter of not paying the banks back… This is no argument which is available.”

Shrouded in secrecy

The Internal Advisory Committee, made up of the Reserve Bank’s independent directors, advises the central bank on the resolution of stressed loans through a new insolvency code that came into effect from December. Under the Insolvency and Bankruptcy Code, 2016, defaulting companies can be taken to the National Companies Law Tribunal, which has seven days to either admit the case or decline it. After the admission of a case, the tribunal has to resolve it with a committee of creditors within 180 days, or 270 days in case of extraordinary circumstances.

The Internal Advisory Committee held its first meeting on June 12 in which it took the decision to refer the first batch of 12 companies – which the Reserve Bank said accounted for more than 25% of the bad loans existing at that time – for bankruptcy proceedings. The central bank soon after issued a press release saying the committee had arrived at an “objective, non-discretionary criterion for referring accounts for resolution under Insolvency and Bankruptcy Code”.

In its reply to Scroll.in’s right to information application, the central bank repeated portions of this press release but did not divulge how the committee had arrived at such an “objective, non-discretionary criterion”.

The central bank denied the requested information citing Section 8 (1) (d) of the Right to Information Act, which bars disclosure of:

“Information including commercial confidence, trade secrets or intellectual property, the disclosure of which would harm the competitive position of a third party, unless the competent authority is satisfied that larger public interest warrants the disclosure of such information.”

Quoting from its earlier press release, the bank said in its response:

“The Internal Advisory Committee recommended for IBC [Insolvency and Bankruptcy Code] reference all accounts with fund and non-fund based outstanding amount greater than Rs 5,000 crore, with 60% or more classified as non-performing by banks as of March 31, 2016. The IAC noted that under the recommended criterion, 12 accounts totaling about 25% of the current gross NPAs [non-performing assets] of the banking system would qualify for immediate reference under Insolvency and Bankruptcy Code.”

Why did it choose 25% and not, say, 30% of the gross bad loans as a cut-off? Why was the cut-off date for selection of these accounts March 31, 2016 and not any other? The answers to these questions would have only emerged from the minutes of the meeting, which the Reserve Bank refused to share.

Furthermore, the press release, itself, proved a problem. Usually, instructions of any government institution, including the Reserve Bank, are passed in the form of executive orders. But in this case, the bank merely issued a press release. The Gujarat High Court, hearing a petition by one of the 12 companies listed for insolvency, pulled up the Reserve Bank for telling the National Companies Law Tribunal to take up these cases on a priority basis through a press release. It noted that the tribunal worked under a law and a mere press release could not alter its functioning. The bank consequently withdrew that part of the press release.

Did the internal committee provide bad legal advice to the Reserve Bank or was the bank’s legal cell at fault? Again, the minutes of the meeting would have likely held the answer to this question.

The committee has now released a second list of 26 loan defaulters for debt recovery proceedings. Again, the basis on which this selection was made remains unknown to the public.

Experts’ take

Withholding information is not in larger public interest, say economists and researchers. Pratik Datta, a public policy researcher at the National Institute of Public Finance and Policy, said it is imperative that people know how these decisions are being made inside the walls of the Reserve Bank because they affect the lives of each taxpayer.

“If we do not know how they arrived at the conditions for listing some companies for bankruptcy while letting others come second in the line, we cannot critique or provide constructive feedback,” he said. “The withholding of information is unnecessary and the RBI should not be waiting for court orders such as in the Gujarat High Court case to make public information as simple as minutes of the meetings held by its committees.”

According to Datta, lack of public information and data only adds to information asymmetry in the country, which stops economists and academics from doing gainful research.

However, some believe the relationship between banks and their customers – which the Reserve Bank cited when it refused to reveal the names of loan defaulters in the Supreme Court in 2015 – allows the central bank to withhold information.

Udit Kariwala, an analyst for the financial institution India Ratings, explained that the Reserve Bank may not disclose such information because commercial banks and their customers have a fiduciary relationship that allows banks to keep information about their loans and deposits secret unless there is a legal order to do otherwise.

“As a regulator, the RBI has the power to tell banks to classify certain assets as bad debts but we don’t know what went behind the curtain and how these decisions were made,” he said. “The RBI is also connected to banks which act in the interest of their customers, so the RBI may have some grounds to hold back on the information.”