LOAN WRITE-OFF TO WAIVERS – THE LAW OF POLITICS
The RTI Trigger:
Recently, on April 24, 2020, when the
Reserve Bank of India (“RBI”) replied to Shri Saket Gokhale under the RTI Act providing
the details of 50 willful defaulters and the amounts owed by them as on
September 30, 2019(1), it immediately
snowballed into a political controversy with the Opposition alleging that the
Modi government had favoured its friendly industrialists (some of whom have
also gone fugitive economic offenders) with the waiver of Rs.68,607 crores. The Press also fell prey to surmises and
wrote that the RBI had effected this waiver.
Twitter tirade soon broke out that a Minister in the Centre schooled an
opposition leader to take tuitions from a former finance minister belonging to
his party to appreciate the differences between loan ‘write-offs’ and ‘waivers’. The law of politics on this subject had
become murkier and we do not know whether tuitions were taken and lessons learnt
on the subject, but, we will endeavor to understand the legal nuances
associated with the issue and before wrapping up this piece of work come to a determinative conclusion
on the issue.
A Peep into Bankers’ Policies and Practices:
Before we proceed to unravel the above
issue, it would be imperative to understand and underscore the policies and
practices prevalent with the banking industry on this subject. Banks and lenders have always enjoyed a
discretion to either postpone and/or scale down the recoveries of bad loan
accounts. When the loan repayments hit
roadblocks arising out of genuine circumstances, lenders have often permitted
moratorium against recoveries and even took haircuts and sacrifices on their
principal and interest receivables with a view to reviving and rehabilitating
the borrowers. Traditionally, under the
voluntary route, the lenders have acted through the non-statutory mechanisms
such as One Time Settlement (“OTS”), Roll Over, Corporate Debt Restructuring
(“CDR”), Strategic Debt Restructuring and Sustainable Structuring of Stressed
Assets schemes. Involuntarily, the banks were also, from time to time, enjoined
by popular governments to enforce agricultural loan and other cooperative loan
waivers. In terms of statutorily
recognized schemes envisaged by the Sick Industrial Companies Act, Insolvency
legislations, Companies Act, 1956 and the SARFAESI Act, the lenders were/are
permitted to legitimately take haircuts and make sacrifices in the loan
recovery. In the recent times, under the
Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”), the financial creditors end
up making significant sacrifices of the loans owed by corporate entities when
resolution plan is approved by the NCLT and implemented during the course of
the Corporate Insolvency Resolution Process (“CIRP”).
Lenders’ Sacrifices in Some Circumstances:
Re-scheduling or offering
rehabilitation package to the borrowers to genuine and deserving cases of
borrowers has now become well recognized and entrenched in our fiscal policy
and law. The banks cannot declare
borrowers as ‘willful defaulters’ without following the due process of law(2).
They have no escape and are obliged to act within the guidelines of RBI in
extending OTS in a non-discriminatory fashion, provided the borrower’s case
falls within the guidelines issued by RBI(3).
Some of the means and mechanisms through
which banks and lenders typically offer certain sacrifices towards their
borrowers are illustrated below:-
(a) Roll-over of Loans and Ever-greening:
Roll-over of loans is a legitimate
process when the lender agrees to extend the period of loan repayment of a
borrower’s account for bonafide business difficulties. However, ever-greening
is an invidious practice adopted by some banks to sanction fresh loans so as to
settle the overdue loan accounts which would otherwise slip into Non-Performing
Assets accounts. Both these processes,
however, have an effect of reduced or doubtful recovery chances which over a
period of time may affect the lenders’ ability to collect chronic loan
defaults.
(b) Moratorium on Repayments and Recovery Proceedings:
In the normal course of things, banks
have discretion to effect a moratorium on the repayments in case borrowers have
genuine difficulties in servicing the loans.
The repayment is merely deferred and delayed in the case of moratorium
of repayment for a definite period as in the case of CDR and upon the expiry of
said moratorium period, the repayment instalments, with or without interests,
would commence. The loss of interests arising
out of such moratorium erodes the lender’s capital. Suspension of legal proceedings, including
recovery of loans, as envisaged under section 22 of the Sick Industrial
Companies Act, 1984 (“SICA”) was greatly abused by the borrowers in our country
resulting in the perpetual deferment of recovery proceedings by lenders. The successor legislation to the SICA viz. IBC, 2016 which introduced
moratorium under section 14 of IBC is limited in duration for 180 days
extendable by another 90 days. These
moratorium sometimes have the effect of not only delaying, but also defeating
the recovery possibilities of the loan account causing losses to the banks.
(c) One Time Settlement:
RBI guidelines as adopted by the
individual scheduled commercial banks policies hold the field in relation to
the entertaining of borrower’s requests for approval of OTS, mostly in relation
to the Micro, Small and Medium Enterprises Sector(4), which usually seeks to realise at least the outstanding
principal and in most circumstances the banks forgo the interests where the
borrowers have acted genuine and have not resorted to either diversion or
siphoning of the funds. In this process,
banks end up sacrificing the interests, costs and other charges over the
outstanding loans with the haircuts taken by the banks often in the range
of 40-60 per cent which in some cases even
extend up to 90% of the loan receivables(5). RBI only lays down guidelines for such
haircuts, but, it is the prerogative of each commercial bank to decide on the
quantum of haircut it can take for its borrowers’ loans. In this process, the only advantage which
accrues to the banks is the immediate liquidity of the principal amount whose
Net Present Value is better than the uncertainties associated with recovery
proceedings. OTS results in the
compromise and settlement of all pending cases and the relinquishment of right to
initiate any fresh cases against the borrowers.
(d) Scheme of Arrangements:
The scheme of compromise with lenders
and scheme of arrangement by companies under section 391 to 394 of the
erstwhile Companies Act, 1956 was one of the most resorted practices which
resulted in the restructuring of companies with huge loan recasts, deferments,
moratorium and haircuts and sacrifices made by the banks and financial
institutions so as to revive the companies under schemes which are approved by
the High Courts.
(e) Revival Scheme under SICA:
Most rehabilitation
packages cast an obligation upon the participating banks/creditors (who might
be entitled to claim outstanding dues from the sick company) to not only forego
some part of the interest liabilities or even accept a lumpsum settlement, but
also to do something positive, i.e. to increase/enhance or continue with
recurring funding of a venture which otherwise would be wound-up. Under section 19 of the SICA when any scheme
is sanctioned by BIFR, it had required lenders to provide further financial
assistance to a sick industrial company by way of loans, advances or guarantees
or reliefs or concessions or sacrifices which led to the widespread of
frittering away of the financial resources of the banks in our country. In the case of BIFR scheme, the sick industries were given
financial assistance by way of loans, advances or guarantees or reliefs or
concessions or sacrifices by Government, banks public financial institutions
and other authorities.
(f)
Corporate Debt Restructuring:
CDR was introduced by RBI as a
voluntary non-statutory arrangement by banks to restructure the accounts of
borrowers who are not classified as willful defaulters and whose accounts do
not involve any frauds. Several
corporates in our country have availed CDR and some of them even availed CDR
twice. The CDR cell has approved
restructuring of stressed loans worth Rs. 4 trillion since its inception in
2001, of which Rs. 84,677 crore worth of loans exited the CDR cell successfully
while Rs. 1.84 trillion exited without success and now nearly Rupees 1.32
trillion worth of bad loans are presently undergoing restructuring in the cell(6).
In a typical case of CDR, the
lenders agree to a moratorium, sacrifice of loan principal and interest
receivables, recasting the loans, extending the repayment schedule and in some
cases releasing of additional and fresh loans to help revive the borrower
companies. In some cases, the lenders
may also agree to convert their debt into equity in the borrower company thereby
reducing the quantum of loans and in return may seek a right of recompense which
is very illusory. In all instances of
CDR, there is a significant write-off and loss to the receivables of a bank, by
way of hair-cuts and sacrifices.
(g) Assignment to Asset Reconstruction Companies:
With the enactment of the SARFAESI Act,
2002, the banks and financial institutions were permitted to assign and sell
their loans to Asset Reconstruction Companies (“ARC”) in terms of section 5
thereof, at huge discounts. This enabled
the banks and financial institutions to quickly get rid of their sticky loans
and NPAs to ARCs and realise only a part of the value of the outstanding loan
receivables of its borrowers. ARCs remit
only a small upfront money and subsequently settle a heavily discounted
consideration to the banks for such assignment and same was neither considered
to be against public policy nor the receipt of only a meagre portion of their
loan receivables from the ARCs were struck down by our courts(7).
The banks and financial institutions lost heavily on these assignment of
loans, but, in the process managed to clean-up their balance-sheets.
(h) Loan Write-off and Waivers:
As per the RBI data on global
operations, public sector banks have written off, including compromise, an
amount of Rs. 2,41,911 crores from 2014-15 till September 2017 which amount
stood at Rs. 3,16,500 crore as on April 2018. Government of India has clarified
that “writing off of loans is done, inter alia, for tax benefit and
capital optimization. Borrowers of such written off loans continue to be liable
for repayment. Recovery of dues take place on ongoing basis under applicable
legal mechanisms. Therefore, write-off does not benefit borrowers(8).”
Our judiciary holds that a bank may
exercise its "right of waiver" unilaterally to absolve the debtor
from its liability to repay and upon such exercise, the debtor is deemed to be
absolved from the liability of repayment of loan subject to the conditions of
waiver(9). The last debt waiver
scheme viz. Agricultural Debt
Waiver and Debt Relief Scheme, 2008 ("ADWDRS, 2008") announced by the Union
Government was implemented in the year 2008, whereunder the debt waiver
portion of the ADWDRS, 2008 was closed by its due date i.e. 30.6.2008, while
the debt relief portion of the Scheme was closed on 30.6.2010, with its benefits
having been extended to 3.73 crore farmers to an extent of Rs. 52,259.86 crore(10).
This was followed up by several state governments extending their own
loan waiver schemes as part of their election manifestos, despite objections by
RBI(11) and it is estimated that if
every state were to waive even 50% of their agricultural debt, it would cost 1%
of India’s GDP in terms of 2016-17 price(12).
(i)
Lenders’ Sacrifices under IBC, 2016:
In terms of IBC, 2016, financial
creditors are entitled to initiate CIRP against corporate debtors under section
7 which when admitted by NCLT under section 13 will result in a declaration of
a moratorium under section 14 and the appointment of an interim resolution
professional. Unlike SICA, the
moratorium period and the CIRP period is also limited in duration and cannot
extend indefinitely and therefore resolution of insolvency of corporate debtors
is time-bound. Under IBC, 2016, the
financial creditors will constitute a Committee of Creditors which will evaluate
and recommend a resolution plan submitted by a resolution applicant for its
approval by NCLT. Once the resolution
plan is approved by NCLT under section 31, it will be binding on the corporate
debtor, its employees, members, creditors, guarantors and other stakeholders
involved in the resolution plan. In case
there is no approval of any resolution plan, then, the corporate debtor
proceeds for liquidation in which case the right of the financial creditor to
receive the distribution of the assets of the company is regulated by section
54 of IBC, which ranks secured creditors ahead of the unsecured creditors.
Although the provisions of IBC, 2016
are much more effective and time-bound than those in SICA, yet, its actual
implementation remains dogged with the resolution plans approved by NCLT
involving huge haircuts and sacrifices by the banks(13). It has been held by
our Supreme Court that initiation of CIRP is not a recovery proceedings against
borrowers and is aimed at only resolving the corporate insolvency of a
corporate debtor(14). The RBI had issued a circular in February
2018 disbanding all CDR schemes and urging banks to evolve a resolution plan
within 180 days for those borrowers who have cumulative exposure of more than
Rs.2000 crores borrowings(15) and
upon its failure to initiate proceedings against such borrowers under the
provisions of IBC, 2016. In the wake of
the Supreme Court striking down the said RBI circular as unconstitutional(16), upon carrying out the changes
necessitated by the verdict, the RBI had once again issued a revised statutory
directions on initiating resolution plan for big ticket stressed assets(17).
Consequently, this process had also result in huge sacrifices and
hair-cuts to the lenders when the resolution plans for big ticket borrowers are
approved and implemented.
Loan Waiver Practices & Criticism:
However, at the same time, both the
Government and the regulators like the RBI have been engaged in a turf war on
the advisability of loan waivers. When our apex court was approached
to regulate the matter of waivers, write-offs, rescheduling of repayments,
moratoriums and one-time settlements by banks which result in loss of
substantial amount of public funds, it merely proceeded to flag the issue for
consideration by the Committee of Experts under the Chairmanship of Shri Vepa
Kamesan, Ex-Deputy Governor of Reserve Bank of India(18). There is criticism from successive RBI
Governors that loan waivers breed a dishonest culture amongst borrowers and it
has only a temporary poverty alleviation results on the small farmers and
therefore agricultural and crop loan waivers should not be encouraged(19).
A World Bank study on India’s debt waiver scheme also suggests that although
temporarily it provides for alleviating the conditions of the rural agriculturists,
it does not provide a long term solution to their economic conditions(20). But, it is always the legal prerogative of elected governments to honour their electoral promises contained in the manifesto promising loan waivers, subject to balancing the overall economic impact on the GDP and the economy and the targeted results of providing reliefs.
Finally, the Write-off vs.
Waiver Conclusion:
We have traced in reasonable detail on
the ways and means by which banks in their normal course of business end up
suffering haircuts and sacrifices, either through voluntary mechanisms or
through statutory binding processes which may entail writing-off. However, we need to distinguish between
write-offs and waivers as discerning
individuals. A write-off of a loan by a
bank is merely an accounting treatment which results in provisioning for usually
unrecoverable (but, not impossible to recover) bad debts and aims at securing a
tax deduction to the bank. It does not
legally relinquish or extinguish its statutory claims against the
borrowers. A mere act of cleaning up its
balance sheet cannot result in the legal extinguishment of a bank’s right to
recovery. RBI had also clarified that in
case of such ‘technically written-off’ accounts, the loan is written-off in the
accounts maintained at the head office of the banks without forgoing the right
of recovery and that they are generally carried out from the accumulated provisioning
maintained for bad loans; it has also reminded that once the recoveries are
made, then, the money flows back into the profit and loss account of the banks
concerned(21). Thus, viewed, in the case of write-offs there
is neither a forgoing or relinquishment or extinguishment of the right to
recover the loans. Incidentally, it will also be evident that
even in relation to the written-off dues of Rs.4,32,584 crores made by the PSU
banks for the period between 2015-16 to 2018-19, when the banks were able to
recover an amount of Rs.8,033 crores in relation to such written-off accounts(22), it will prove beyond doubt that
in case of written-off accounts, the banks’ right to recovery dues are not
waived or relinquished. On the other
hand, a loan waiver is an express and irrevocable relinquishment of the right
of recovery agreed to by a bank or lender in pursuance to a debt relief scheme
announced by the competent government (Union or the State Government) and
subject to compliance with the eligibility and other conditions stipulated
under the scheme. Once a borrower’s application
for waiver is accepted in terms of the scheme, then, the bank irrevocably looses
its right to recovery any monies from the borrower thereafter. Therefore, loan write-off and waiver is
neither synonymous nor supplanting the other and it is only the sensational
press and the opportunist political lobby which seeks to thrive in a
non-existing confusion, when the facts and law on the subject remain beyond any
pale of doubt.
Thus viewed, the RBI reply under the
RTI Act dated April 24, 2020 referred to in the beginning of this work
abundantly makes it clear that it has been only a matter of write-off and not
waiver of the loan dues. The language employed
therein that “… amount outstanding & amount technically/prudentially
written-off as on September 30, 2019 reported in CRILC by the Banks…” clarifies
that it is the concerned banks and not the RBI which has written-off and that
it is nothing by a technical/prudential writing-off of the outstanding loan
amount. It is also for this reason that
none of the proceedings, including, those initiated under the Fugitive Economic
Offenders Act, 2018 against some of the individuals who feature in the list of
the 50 willful defaulters have either been abandoned or relinquished by the
CBI/Enforcement Directorate, which would otherwise have been an inescapable corollary if
the loans have been irrevocably waived vis-à-vis
them.
End Notes:
(1) Letter no.DOS.CO.RIA Cell/AM(14)/09.39.003/2019-20
dated April 24, 2020 issued by the Reserve Bank of India to Shri Saket Gokhale.
(2)
See Subhiksha
Trading Services Limited, Chennai, Company Secretary, M. Rathinakumar vs. Kotak
Mahindra Bank Limited, and Ors. 2009 INDLAW MAD 1694 and Sudarshan Overseas Limited vs. Reserve Bank
of India and Another 2009 INDLAW DEL 626.
(3)
Sardar Associates and Ors. vs.
Punjab and Sind Bank and Ors. (31.07.2009 - SC) : MANU/SC/1351/2009
(4) See
RBI Circular No.RBI/2008-09/467
RPCD. SME&NFS. BC.No.102/06.04.01/2008-09 dated May 4, 2009
RPCD. SME&NFS. BC.No.102/06.04.01/2008-09 dated May 4, 2009
(5)
See https://www.financialexpress.com/industry/banking-finance/idbi-bank-default-cases-settled-with-90-pct-haircut-malvika-steel-to-usha-ispat-see-how-surprisingly-low-settlement-was/950181/ as last accessed on 16.11.2018
(7) See ICICI Bank vs. Official Liquidator of APS Star Ltd. AIR 2011 SC
1521
(8) The Press Release dated March 28,
2018 of the Ministry of Finance, Government of India.
(9) The
Commissioner vs. Mahindra and Mahindra Ltd. (24.04.2018 - SC) :
MANU/SC/0513/2018
(10) The Press Release dated March 28,
2018 of the Ministry of Finance, Government of India.
(11) See
https://www.orfonline.org/expert-speak/are-loan-waivers-breeding-a-defaulter-nation/ accessed on 12.12.2018
(12)
Nilanjan
Banik, Are Loan Waivers a Panacea for
Rural Distress?, Economic & Political Weekly, Vol. LIII No.47, December
1, 2018
(13) See https://www.thehindubusinessline.com/money-and-banking/bankruptcy-code-babysteps-towards-recovery-of-bad-loans/article10002680.ece
visited on 16.11.2018. Also, see https://www.rediff.com/business/report/why-banks-are-uncomfortable-with-bankruptcy-code/20171004.htm
as accessed on 16.11.2018
(14) B.K. Educational Services Private Limited vs. Parag Gupta and
Associates MANU/SC/1160/2018
(15) RBI/2017-18/131
DBR.No.BP.BC.101/21.04.048/2017-18 dated February 12, 2018
(16) Dharani Sugar & Chemicals Limited vs. Union of India Supreme
Court of India order dated April 2, 2019.
(17) The Reserve Bank of India
(Prudential Framework for Resolution of Stressed Assets) Directions, 2019
issued by RBI vide reference no.RBI/2018-19/2003 DBR
No.BP.BC.45/21.04.048/2018-19 dated June 7, 2019.
(18) Common Cause (A Regd. Society) vs. Union of India (UOI) and Ors.
(18.08.2010 - SC) : MANU/SC/0615/2010
(19) Opening remarks of Mr. Urjit
Patel, RBI Governor in the Seminar on ‘Agricultural Debt Waiver – Efficacy and
Limitations’ held on August 31, 2017 and the views of Mr. Sakthikanth Das, RBI
Governor that ‘generalised farm loan waiver will affect credit culture’ expressed
in his interview to the press given on January 7, 2019. See also, the case study by Deepa S. Raj &
Edwin Prabu.A “Agricultural Loan Waiver: A
Case Study of Tamil Nadu’s Scheme”, RBI Occasional Papers, Vol.39,
No.1&2, 2018.
(20) Martin Kanz, “What Does Debt Relief Do for Development? Evidence from India’s Bailout
Program for Highly-indebted Rural Households’, World Bank Policy Research
Working Paper 6258, November 2012.
(21) Reserve Bank of India’s
clarification dated February 9, 2016 titled “Banks Write-offs: Clarification’.
(22) See https://www.newindianexpress.com/business/2020/may/08/just-10-per-cent-of-bank-loan-write-offs-are-recovered-rti-reply-2140578.html
accessed on 28.05.2020.
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