Above: Union Finance Minister Arun Jaitley and RBI Governor Urjit Patel at an RBI meeting/Photo: UNI
With the government invoking Section 7 of the RBI Act, the top bank’s governor, Urjit Patel, comes under intense pressure from both the Executive and the Central Information Commission
By Venkatasubramanian
The war of words between the Reserve Bank of India (RBI) and the government has just got sharper. RBI Governor Urjit Patel reportedly stood firm against the finance ministry’s demands for the transfer of
Rs 3.6 lakh crore out of its contingency reserves and relaxation of its regulatory curbs on State-owned banks which are reeling under the impact of a huge stack of unrecoverable loans.
In fact, tension between the government and the RBI has reached such a point that the former has reportedly initiated steps to invoke its powers under Section 7 of the RBI Act of 1934. This is the first time the government is exercising its powers under Section 7. It is a provision under which the government can give directions to the RBI to take certain actions “in the public interest”.
Almost as a coincidence, Patel received a show cause notice from the Central Information Commission (CIC) for defying a Supreme Court order to disclose a list of wilful defaulters in response to a Right to Information (RTI) application made three years ago.
The RBI is a regulatory body which does not have a fiduciary relationship with the banks. Therefore, the Supreme Court found that the RBI does not have a valid justification to withhold disclosure sought under the RTI Act. The RBI had disclosed to the Court a list of 150 wilful defaulters who had reneged on loans worth over Rs 500 crore. The RBI did so in a sealed cover, with a request not to divulge that information.
In Sandeep Singh Jadoun v PIO, DGEAT (Director General of Employment and Training), the appellant sought information about wilful defaulters of bank loans of Rs 50 crore and above, with or without guarantees, the names of guarantors, details of sanction of loans, default and details of non-performing asset accounts, etc. The appellant also wanted to know the cost and investment of the projects for employment generating schemes initiated by the centre between 2005 and 2018 along with the list of failed ones and those which only existed on paper with which the Ministry of Labour and Employment (MoLE) is concerned. Dissatisfied with the Central Public Information Officer (CPIO)’s refusal to share information, the appellant approached the CIC.
The CPIO had dismissed the request, saying “information was not maintained in the form sought”. The CIC found this to be neither a defence nor an exception. The reply, according to the CIC, showed that the CPIO had the information sought in some form, but did not give it. The department, the CIC held, is expected to have a record of cost and investment of the projects, and employment generated by them. They should also have the list of successful and failed projects which only existed on paper, and were never introduced, the CIC held. If there are no failures, it should have been proud of it. “It is their duty to explain the reasons for the failures, if any,” the CIC said in its order.
The CIC, M Sridhar Acharyulu, said in his 48-page order on November 2: “Surprisingly, the defaulters of small amounts like farmers are defamed in public, while the defaulters above Rs 50 crore were given a long rope, high concessions in the name of one-time settlements, interest waivers, several other privileges and their names are hidden from exposure to secure their reputation!”
The CIC’s order disclosed that according to RBI data, which is in the public domain, just 12 companies are estimated to account for 25 percent of the gross NPAs, and were identified for immediate bankruptcy proceedings, while there are 488 others which have been given six months to restructure their debt or be dragged to the National Company Law Tribunal.
In October last year, The Financial Express had published the list of 12 companies. These are Bhushan Steel Ltd., Lanco Infratech Ltd., Essar Steel Ltd., Bhushan Power and Steel Ltd., Alok Industries, Amtek Auto Ltd., Monnet Ispat and Energy Ltd., Electrosteel Steels Ltd., Era Infra Engineering Ltd., Jaypee Infratech Ltd., ABG Shipyard Ltd. and Jyoti Structures Ltd.
Reuters, through information obtained under the RTI Act, reported that power, steel, road infrastructure and textiles sectors are the biggest loan defaulters of State-owned banks.
Loan defaults or NPAs by the companies are distinguishable from bad loans. A loan becomes bad when a bank declares that it cannot recover the amount lent to a company. According to the newspaper report, bad loans had hit a record high of Rs 9.5 lakh crore at the end of June 2017. Another media report, according to the CIC’s order, said that as on September 30, 2017, more than Rs 1.1 lakh crore was owed to banks by “wilful defaulters”. There are more than 9,600 such accounts for which banks have filed lawsuits for recovery and found that the top 11 debtor groups, each with dues of over Rs 1,000 crore, together had over Rs 26,000 crore owed to the banks.
After several bank officials were arrested in Rs 11,400-crore Punjab National Bank (PNB) scam, the All India Bank Officers Confederation (AIBOC), with a membership of three lakh officers, challenged the centre to publish names of the wilful defaulters of all banks. The AIBOC also urged that the banks be given the liberty to write to the home ministry to take over the passports of directors of defaulting companies to prevent their escape. The AIBOC asked why the RBI hesitated in publishing the list of defaulters like Vijay Mallya, Nirav Modi and Mehul Choksi while allowing them to leave the country. It questioned why the banks were writing off loans of thousands of crores every year in favour of corporate bodies.
The CIC’s order cites media reports to suggest that about 7,000 millionaires shifted residence outside India or changed their citizenship. The centre admitted in Parliament that 31 business people facing CBI investigation had flown out of the country. A committee, headed by financial services secretary Rajiv Kumar, with representatives from the RBI, the ministries of home and external affairs, the Enforcement Directorate and the CBI, has recommended stopping wilful defaulters with loans exceeding Rs 50 crore from travelling overseas without prior approval. In March, banks were directed to seek the passport details of borrowers taking loans of Rs 50 crore and more.
For the quarter ending June 30, 2018, 3,385 suits were filed against defaulting companies that had wilfully defaulted on loans of Rs 25 lakh and above—amounting to a whopping Rs 57,523.90 crore. The finance ministry also directed public sector banks (PSBs) to examine all NPA accounts of over Rs 50 crore for possible fraud and accordingly, report the cases to concerned investigating agencies, including the CBI, ED, and Directorate of Revenue Intelligence (DRI), if any wrongdoing was detected.
The CIC order cited the RBI’s Financial Stability Report, 2017, to show that India’s gross NPAs stood at 9.6 percent. Finance Minister Arun Jaitley told the Lok Sabha on August 11, 2017, that the gross NPAs of PSBs increased by 311.22 percent from Rs 1,55,890 crore in 2013 to Rs 6,41,057 crore in 2017.
According to the rating agency, CARE, as of June 2017, State Bank of India leads the list of scheduled banks with the highest NPAs with Rs 1,88,068 crore of stressed assets. PNB and IDBI followed with
Rs 57,721 crore and Rs 50,173 crore of gross NPAs, respectively. IDBI Bank, which has 24.11 percent gross NPAs, tops the list for lending institutions with the highest exposure to liabilities. The RBI, according to the CIC’s order, had framed a scheme with effect from April 1, 1999, requiring banks and financial institutions to submit to the RBI the details of wilful defaulters. The RBI also recommended criminal action by banks under Sections 403 to 415 of the Indian Penal Code, which deal with cheating.
The CIC also noted that the ministry of corporate affairs had introduced the concept of a Director Identification Number (DIN) with the insertion of Sections 266A and 266G in the Companies (Amendment) Act, 2006. The purpose of this amendment was to ensure that persons whose names appear to be similar to those of directors appearing in the list of wilful defaulters are not wrongfully denied credit facilities if they include the DIN in the data submitted by them to credit information companies.
Section 4(1)(c) of the RTI Act requires every public authority to publish all relevant facts while formulating important policies or announcing the decisions which affect the public, while Section 4(1)(d) requires it to provide reasons for its administrative or quasi-judicial decisions to affected persons.
The CIC order notes that the finance ministry, the ministry of statistics and programme implementation and the RBI have a duty to inform people from time to time of all updated information and to remove the apprehensions expressed by the AIBOC and the media on the issue of wilful defaulters of Rs 50 crore and above.
The RBI, in its response, cited “a basic and long-established common law proposition” that without the expressed or implied permission of a customer, a bank must not disclose either the state of his account, any of his transactions with a bank or any information related to him acquired by reason of keeping the account, subject to certain limited and defined exceptions. The RBI also drew support from existing legal provisions to buttress its contention.
The RBI also drew attention to Section 43A of the Information Technology Act, 2000, and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011, framed under the Act which gives protection to sensitive personal data or information of customers of body corporates. Rule 5(5) of these rules provides that information collected shall be used for the purpose for which it has been collected.
The RBI told the CIC that it was absolutely necessary to ensure that disclosure of any information by it is in accordance with law, and that it can publish any information obtained by it under the Banking Regulation Act, 1934, only in a consolidated form. The RBI claimed that what is being provided by banks/financial institutions to it is customer-related confidential information. “The original classification of such information is not disturbed and the applicable exemptions under RTI Act, 2005, from disclosure would continue even when the information is submitted to the RBI by various banks. Any other interpretation would result in an anomalous and confusing situation, which is not intended under the RTI Act, 2005,” the RBI told the CIC.
The RBI explained: “If otherwise interpreted, it will lead to a situation when the exemption from disclosure of such information has been recognised in the hands of the banking company, the same will be taken away when the information is held by the RBI. The adage is ‘what cannot be achieved directly cannot be achieved indirectly’.”
The CIC, however, noted that these submissions of the RBI show that its legal wing did not bring to the notice of its CPIO that in RBI vs Jayanti Lal N Mistry, the division bench of the Supreme Court, on December 16, 2015, had upheld the CIC’s direction to it to disclose inspection reports and names of wilful defaulters in many cases, rejecting all the above contentions.
The Supreme Court, the CIC underlined, had already rejected the RBI’s contentions, which it had repeated in this case. The gravamen (essence) of the Supreme Court’s conclusion is that the RBI does not place itself in a fiduciary relationship with the financial institutions because the reports of inspections, statements of the bank, information related to the business obtained by the RBI are not on the pretext of confidence or trust. In this case, neither the RBI nor the banks act in the interest of each other. By attaching an additional “fiduciary” label to the statutory duty, the regulatory authorities have intentionally or unintentionally created an in terrorem effect, the Supreme Court had held.
Saying that the RBI is supposed to uphold public interest and not the interest of individual banks, the Supreme Court had made it clear that the RBI is clearly not in any fiduciary relationship with any bank. The RBI has no legal duty to maximise the benefit of any public sector or private sector bank, and thus there is no relationship of “trust” between them, it has reasoned. It held that the RBI ought to act with transparency and not hide information that might embarrass individual banks.
The CIC concluded: “If RBI fails to see any public interest behind this information request, it will be blind forever to understand and find what is in best economic interest of the nation, which would amount to dereliction of constitutional responsibility of independent regulatory institution.”
Twenty-nine State-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts between financial years 2013 and 2015, much more than what they had done in the preceding nine years. As per RBI data, between April 2014 and April 2018, 21 State-owned banks wrote off Rs 3,16,500 crore of loans even as they recovered Rs 44,900 crore. According to a report, the amount of bad loans written off by PSBs during the four-year period is well over twice the projected budgetary expenditure on health, education and social protection for 2018-19 at Rs 1.38 lakh crore.
The CIC concluded that every evasion of loan is misappropriation of public money, which the public has a right to know. Vibrant citizens have a democratic duty to scrutinise the way huge loans are being granted without securing them properly. It is unfortunate that banks and the government are waging legal wars on the citizens who are seeking information to protect the names and other details of wilful defaulters, despite the Supreme Court’s judgment to the contrary, the CIC observed.
The CIC, therefore, directed the CPIOs of the RBI, the PMO and the office of the finance minister to explain the action taken on the alerting letter written by former RBI Governor Raghuram Rajan on February 5. They are to do so before November 16, 2018.
The CIC has threatened to initiate penal proceedings against the CPIO of the RBI if he fails to place the list of defaulters on its website as per its earlier orders, and as confirmed by the Supreme Court in the Jayantilal case. Holding Urjit Patel and other officers of the top management of the RBI responsible for dishonouring the Supreme Court’s directions, the CIC considered the governor as the “deemed PIO” responsible for non-disclosure and defiance of the SC and CIC orders, and directed him to show cause why maximum penalty should not be imposed on him for these reasons before November 16, 2018. The CIC also directed its administrative officers to explore the possibilities of enforcing the orders of then Information Commissioner Shailesh Gandhi which were taken in appeal up to the Supreme Court by the RBI (which subsequently lost it). All eyes are on November 16 when the CIC hears the matter again to review whether the RBI has complied with its directions.