Reform banking laws to prevent loan defaults, SC tells govt

The Supreme Court has asked the government to ''reform'' the banking regulations to prevent huge write-offs of bad loans and also to ensure that loan defaulters cannot run away without repaying the loans.

The apex court directed the finance ministry to provide details of any mechanism in place and steps taken to recover huge non-performing assets (NPAs) of the nationalised banks.

A bench headed by Chief Justice T S Thakur, while seeking a response from the RBI and the Indian Banks Association on various issues related to banks' bad loans, said the current system is not helping to safeguard the interests of the banks.

''If your (government) system was perfect, you could not have such huge NPAs'', it said, adding, ''Something is missing (in the current system). Something is not working. Don't take this as adverse remark. But steps are needed to prevent such huge write-offs. We are looking at suggestions to reform the system and prevent the huge write-offs.''

The bench asked Solicitor General Ranjit Kumar on the current institutional mechanism to check bank defaults and what reforms the government intends to introduce, to which he informed the court that some ''amendments are in the offing. And the Bankruptcy Code is likely to come into effect soon''.

Kumar also told the apex court that the government is already working to contain the bad loan situation and has various mechanisms like the proceedings before the Debt Recovery Tribunals and the Sarfaesi Act to recover the bad debts.

The chief justice also told the bank to propose a committee, which can look into all these issues. ''We are not financial experts and cannot look into the safeguard issues, but the government should be in a position to evolve safeguards to prevent NPAs. If you propose a committee which can go into all these issues, we will be okay with it,'' he observed.

Counsel Prashant Bhushan, appearing for NGO Centre for Public Interest Litigation (CPIL), told the judges that there is severe discrepancy with respect to the information on loan write-offs provided by individual banks and the RBI.

Bhushan cited the RBI data that showed Punjab National Bank writing off over Rs8,500 crore in the last two years, while PNB has denied writing off any loan during this period. Similarly, while the Bank of India claimed that the bank wrote off more than Rs17,700 crore loans in the last two years, the RBI figure stood at Rs2,567 crore.

The judges said a ''sensible and sensitive'' approach is required to overhaul the entire system, which today has scores of people and entities with outstanding to the tunes of crore of rupees.

The bench also referred to a report in The Indian Express in which the RBI, responding to a RTI application, had said Rs1.14 lakh crore was written-off by public sector banks (PSBs) in the last three years. ''This newspaper has been asking for the information on its own…you today have lakhs of crore as outstanding…people have run away. You have to reform the system.''

''Don't say your system is perfect because had that been the case you, you would not have such huge outstanding and write-offs … something is certainly missing in the system … something is not working and so you must reform it,'' it added.