RBI red-flags Supreme Court cushion to banks on Amrapali funding

The RBI application filed on March 4 objected to the order passed by the top court on August 13 last year specifying three comfort clauses put forth by the banks as a precondition to enter into a consortium agreement

The Supreme Court’s attempts to get a consortium of six public sector banks to fund the stalled Amrapali housing projects faced stiff resistance from the Reserve Bank of India (RBI), with the banking regulator red-flagging the agreement terms which included a complete waiver on the loan being declared non-performing asset (NPA) in the wake of default or delay in repayment.

Although the consortium represented by advocate Alok Kumar sought a direction that the RBI application should not delay or derail the consortium from proceeding, the bench noted that such a direction will not be necessary as the issue would be resolved before the next date of hearing on March 28. (Getty Images/iStockphoto)

With the consortium in the last phase of sealing the deal to provide funds to the Amrapali Stressed Projects Investments Reconstruction Establishment (ASPIRE), a bench of justices UU Lalit and Bela M Trivedi directed the RBI to meet the court-appointed receiver senior advocate R Venkatramani on Wednesday and to sort out the objections in the presence of representatives from the consortium of banks.

“Whoever comes to meet the receiver should be the highest officer who is entitled to take decisions,” the bench said, adding, “After having the meeting with representatives of RBI and consortium of banks, the receiver shall file an appropriate report.” Although the consortium represented by advocate Alok Kumar sought a direction that the RBI application should not delay or derail the consortium from proceeding, the bench noted that such a direction will not be necessary as the issue would be resolved before the next date of hearing on March 28.

The RBI application filed on March 4 objected to the order passed by the top court on August 13 last year specifying three comfort clauses put forth by the banks as a precondition to enter into a consortium agreement. These banks included Bank of Baroda, Punjab National Bank, Punjab & Sind Bank, UCO Bank, State Bank of India, and Bank of India.

These conditions said that funds to Amrapali projects will be categorised under the priority funding sector with a reduced capital charge, status of funds given to ASPIRE projects would remain standard (without being declared NPA) in the event of default or delay in repayment, and thirdly, there would be no further external valuation of Amrapali assets on the economic viability of the projects.

Senior advocate KV Vishwanathan, appearing RBI, told the court that such conditions will set a “bad precedent” and will entail a serious cost to the depositors. “All this funding can go under the extant rules prescribed by RBI. I do not know why the banks insisted on a blanket NPA to be given. Who will absorb the cost to the depositors in the event of a default or delay in repayment?”

Vishwanathan said, “Any masking of risk will impinge upon the transparency of books (maintained by banks) and protection of public money. This goes against the commercial wisdom of banks and will eventually put the interests of depositors in jeopardy which is not in the interest of the financial system.”

The bench said, “We cannot go back to square one. This order was passed seven months ago. We are worried about how funds will be secured and resources managed. Somebody has to finance projects for construction to go on as only then money can come in.” At the same time, it added, “Since RBI is the chief banking regulator, we cannot wish away their application.”

Venkatramani told the court, “I have great reservations on the timing of this application. While working out the conditions, we studied the RBI circulars and when RBI was not in a position to help us, the banks stepped forward to help the project.”

The court noted that in each proceeding of the Amrapali housing case, the lawyer representing RBI was present but did not raise objections.

RBI told the court that banks were free to provide funding to ASPIRE to complete the Amrapali projects but its “asset classification and provisioning” must be subject to relaxations to the extent provided under the applicable norms of RBI.

It sought modification of the conditions introduced in the August 13, 2021, order, as the Master Directions on Priority Sector Lending (PSL)-- issued by RBI in September 2020 and updated later in October 2021--does not automatically make funding to the housing sector eligible for classification as “priority sector”. Such classification applies to “affordable housing projects” that use at least 50% of Floor Area Ratio (FAR)/Floor Space Index (FSI) for dwelling units with a carpet area of not more than 60 square metres.

“Any deviation from these guidelines will consequentially divert bank credit from the other deserving priority sectors of the economy which inter alia include agriculture, education, Micro, Small and Medium Enterprises (MSMEs), social infrastructure, weaker sections, etc., and thus has far-reaching consequences which are not desirable,” RBI stated in its application.

The receiver informed the court that the application has been preferred by RBI at a time when efforts are on to convince homebuyers on the funding of projects. “We have received ₹900-odd crores from homebuyers. And among the 9,000 odd flat buyers who were placed in the defaulters’ list, the list has now shrunk to some 3,000-4,000 people. After two weeks, if nobody turns up, these flats will be declared unsold inventory and sold in the open market,” he said.

Meanwhile, NBCC (India) Limited, formerly known as National Buildings Construction Corporation Limited, also claimed to be cash-starved, although it informed the bench that 3,000 flats are ready for possession. The court had expected the first tranche of payment from the consortium to offset the losses incurred by NBCC in constructing the Amrapali projects.

In July 2019, the Supreme Court had cancelled the registration of Amrapali after its directors had allegedly diverted the money of homebuyers to other businesses and even laundered money through shell companies. Keeping in mind the interest of over 40,000 homebuyers, the court had entrusted the pending projects of Amrapali to NBCC.