Mumbai: The Supreme Court struck down on Tuesday the Reserve Bank of India’s (RBI) February 12 circular which laid out rules for banks to recognise accounts as defaults if the borrower defaulted on payments by one day and to start insolvency action as a remedy. “We have declared the RBI circular ultra vires,” Justice Rohinton F Nariman said while announcing the judgment.
Because the RBI had cancelled all its previous restructuring schemes when it brought out the February 12 circular, banks will now have to individually look at resolution plans.
The Feb 12 circular
The February 12 circular had mandated that the lenders should institute a board-approved policy for resolution of loans that had gone bad. The RBI had directed banks to start the resolution process as soon as a borrower defaulted on a term loan. Lenders were given 180 days to resolve the assets, failing which they would be taken to the National Company Law Tribunal (NCLT).
The previous rulebook for resolution of bad loans allowed banks to initiate resolution proceedings after 60 days of default.
The new guidelines notified by the RBI had been challenged in different court by a bunch of petitioners, including GMR Energy Ltd; RattanIndia Power Ltd, a Punjab-based textile company; Association of Power Producers (APP); Independent Power Producers Association of India; Sugar Manufacturing Association from Tamil Nadu and a shipbuilding association from Gujarat. This is primarily because the one-day rule to declare bad loans had not gone down well with the industry. In an attempt to assuage industry leaders, RBI deputy governor NS Vishwanathan had said in a speech in April last year that the framework was needed because borrowers were preferring yo raise funds from banks as opposed to from the capital markets.
He had said that there was a need for the market to penalise the borrower heavily if they delayed coupon or principal payment on a corporate bond even for a day in order to “restore the sanctity of the debt contract, lest bank debt becomes subordinate even to equity.”
As per RBI data, the top 100 large borrowers accounted for 16 percent of gross loans and 21.2 percent of gross NPAs of banks at the end of the September quarter of FY19.