What is happening at Reliance Capital is a bit funny and hard to fathom. A group known for anything but financial services is willing to go for an upfront all-cash deal for a business, and we don’t know if there are more worms waiting to pop out of the can.

Meanwhile, just when the group is declared the final bidder, an industrial house rooted across commercial vehicles and the banking sector, isn’t willing to let go without a fight. In another instance, at the SREI Group, a similar situation is brewing, and this leads to one question – did the Reserve Bank of India think through adequately while amending the Banking Regulation Act, when it allowed an administrator be appointed to supersede the board of a NBFC in case of mismanagement, including a situation of near bankruptcy?

With banks the RBI has been very careful dealing with such situations. A Plan B is in always in place before invoking the BR Act. The administrator is adequately prepped up on the further course of action, and things happen as planned. But with NBFCs the resolution process is quite messy. Whether DHFL or now RCap, the bid war is fought in the public and suddenly from a dud company with not-so-great assets, the distressed names get projected as some kind of shining stars. People are willing to pay whatever it takes to own it.

The moot difference in the approach for resolution is understandably depositors’ money – banks are the custodians of depositors, while NBFCs, even if deposit-taking, aren’t seen through that lens.

To that extent, the regulator’s approach of ‘let the best bid win’, makes sense. But what justifies the near 2x jump in the initial bid price and final price is beyond fathomable. And if truly the NBFC is so value-accretive, the RBI is well within its powers to change the top management and/or the board of the NBFC, instead of auctioning it out over multiple rounds.

Alternatively, why not initiate a portfolio sell-out and action against the erring promoters, management teams and/or the boards of the entity in question? The current process is just handing out the upside from the dud assets to the best bidder while the questionable people are left free. It’s neither resolving an issue nor fixing responsibilities, but rather just a street fight for some bad loans.

It’s still on the depositors to heavy lift the cost of an NBFC’s default because they ultimately feed on bank money.

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