SC Joins Battle Against Crony Loan Defaulters, But Adds To Business Uncertainty

SC’s new toughness with defaulters – though welcome, flies in the face of earlier verdicts of the Supreme Court where it actually forced banks to let go of their collateral and, in some cases, made it easier for defaulters to delay payment.

Sometimes, one wonders whether the Supreme Court reads its own judgments. If one bench does one thing, another goes another way, sending confusing signals. It has become a new factor in increasing business uncertainty.

A case in point is the decision of a three-judge bench headed by the Chief Justice of India (CJI), TS Thakur, to get tough with bank loan defaulters. According to a report in The Economic Timestoday (17 February), the bench wanted the Reserve Bank of India (RBI) to submit a list of top loan defaulters with over Rs 500 crore in overdues. When the RBI representative said he didn’t have a list, he got a tongue-lashing from the CJI: “What business are you doing if you do not have the information?” The RBI has three weeks to submit the information.

But this new toughness with defaulters – though welcome, given the sheer amount of dues stuck in courts and debt recovery tribunals – flies in the face of earlier verdicts of the Supreme Court where it actually forced banks to let go of their collateral and, in some cases, made it easier for defaulters to delay payment.

In a 2014 judgment, a bench headed by the previous CJI, HL Dattu, said the State Bank of India will have to give cane growers their dues before enforcing its own collateral against sugar mill loan defaulters. The court effectively dented the bank’s ability to recover dues.

A few months later, another judgment by another bench headed by CJI Dattu said that the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), an act intended to help revive sick industrial companies, would take precedence over the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, a law intended to help banks recover loans quickly. It is another matter that even this law has not helped banks recover loans faster, but the court made it easier for defaulters to hide behind SICA to delay recoveries.

The Calcutta High Court, in another judgment, helped Kingfisher Airlines chief Vijay Mallya by rejecting United Bank of India’s bid to call him a “wilful defaulter.” This judgment was given on a mere technicality, but Mallya escaped the lenders’ clutches again.

So, if the current bench headed by CJI TS Thakur is now doing a U-turn on ending the free lunch given to cronies and other borrowers who default on loans, it is a good thing. The other judges on the current bench are R Banumathi and UU Lalit.

However, the bench will have to undo the damage it has done elsewhere first. Two judgments, one helping banks and another thwarting them, send conflicting messages.

But even as good things are happening in the fight against crony capitalism and wilful defaults, the court is doing damage elsewhere.

In another case, the Supreme Court, in another bench headed by CJI Thakur, has taken an anti-market position by insisting that private airlines should fly to unviable destinations.

This case relates to a judgment by the Himachal Pradesh High Court which asked Air India to operate flights to the hill state, but the national airline, reeling under thousands of crores of losses, demurred. But the high court insisted it should do so.

When the matter came to the Supreme Court, the Thakur bench went into policy territory by suggesting that it had the power to order airlines to fly to Himachal.

The Economic Times report quoted the CJI as saying that even private airlines should be asked to fly on the Delhi-Shimla route. Or “we will cancel all licenses unless they connect unviable sectors.”

This is nothing but judicial over-reach. The Supreme Court has no business ordering anyone, in the public or private sectors, to do what they don’t want to do. If at all license conditions have to be changed to force airlines to fly unviable routes, it is the job of the civil aviation ministry. The ideal policy is to offer fixed direct subsidies to airlines to connect cities where it is otherwise uneconomical to fly.

The Supreme Court’s shifting stand on following the logic of market economics is a cause for worry and is adding a new element of uncertainty to the business environment.