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Despite SC order on RBI circular, bad loan resolution under IBC to continue

Sunny Verma, Sandeep Singh
Under its February 12, 2018 circular, the central bank laid down a revised framework for resolution of stressed assets, which replaced all its earlier instructions on the subject.

Even as the Supreme Court has held the Reserve Bank of India's February 12, 2018, circular on resolution of stressed assets as ultra vires, the move will not slowdown the momentum in resolution of non-performing assets (NPAs) that picked up pace since enactment of the Insolvency and Bankruptcy Code (IBC), which has permanently changed the creditor-debtor relationship, a senior government official said.

The government expects the bad loan resolution to continue under the IBC, while the Reserve Bank comes out with revised rule that specifies the framework under which it can direct banks to push cases for insolvency resolution.

"The earlier stance of the RBI put all defaulters in the same bracket, irrespective of the difficulties faced by a particular sector. That will now change as the rules will have to specify conditions for mandating banks in taking defaulting companies to the NCLT (National Company Law Tribunal)," the government official said.

Sources said that the new norms are expected to ensure that directions to banks pertain to specific cases, and are given after being examined by an internal expert panel.

On April 4, RBI Governor Shaktikanta Das had said that the central bank will issue a revised circular for expeditious and effective resolution of stressed assets.

"The Supreme Court has held that RBI's directions under Section 35AA of the Banking Regulation Act, 1949, 'which are in respect of debtors generally' would be ultra vires of that section. Thus, the order of the Supreme Court mandates RBI to exercise its powers under Section 35AA 'in respect of specific defaults by specific debtors'. The powers of RBI under Section 35AA and other sections of the Banking Regulation Act, 1949 ,are, therefore, not under doubt," Das had said.

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Under its February 12, 2018 circular, the central bank laid down a revised framework for resolution of stressed assets, which replaced all its earlier instructions on the subject.

The circular introduced a new one-day default norm, which stated: "As soon as there is a default in the borrower entity's account with any lender, all lenders - singly or jointly - shall initiate steps to cure the default." Banks were required to immediately start working on a resolution plan for accounts over Rs 2,000 crore, which was to be finalised within 180 days. In case of non-implementation, lenders were required to file an insolvency application.

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Apex court order will help in better case consideration

The Supreme Court's decision to quash RBI's February 12 circular is unlikely to derail the insolvency resolution process which has picked pace. Welcoming the decision, government officials say that it will lead to a better case by case consideration and will take into consideration industry specific constraints. If many companies within a sector are doing well, but one or two are defaulting, then one can trigger insolvency resolution as it reflects inefficiency and mismanagement on part of that company.

The circular did not take into account industry specific constraints. "In a sector, if many companies are doing well, but one or two are defaulting, then one can trigger insolvency resolution as it reflects inefficiency and mismanagement on part of that company. But if the whole sector is under duress, like in the case of power companies which went to court, then a measured and flexible approach is needed. That is what is being worked upon now," the government official said.

In referring future cases for insolvency resolution, the banking regulator may apply the same approach it had used for referring the first 12 large cases of default involving outstanding amount over Rs 5,000 crore each.

In these 12 cases, an Internal Advisory Committee, comprising RBI board members, was constituted to arrive at objective criteria for referring cases for resolution under the IBC.