2 April 2019: The Supreme Court decision declaring RBI’s February 12 circular ultra vires may push for a relook to some of the cases referred to the National Company Law Tribunal (NCLT), said a report on Tuesday.
The circular mandates lenders to initiate resolution or restructuring of loans of Rs 2,000 crore and above within six months from the date of default. Also, if resolution fails within stipulated time-frame, the matter has to be referred to the NCLT for resolution under Insolvency and Bankruptsy Code.
“Since the circular has been suppressed, it is likely that some cases referred to NCLT may be looked at afresh. For the corporate-heavy PSU and private banks, this seems to be a near-term positive because of the possibility of delaying incremental stressed asset recognition,” the Centrum report said.
Post the RBI circular, banks have referred close to eight power projects to NCLT. Most of these cases are yet to be admitted under IBC.
Adding that the major beneficiaries of the Supreme Court’s action are likely to be the stressed power and sugar companies, some of whose promoters are fighting to maintain their ownership in their companies.
The report, however, also said that the SC judgement seems to be negative for longer-term and structurally for these corporate-heavy banks from a credit discipline standpoint and from the RBI’s perspective as it undermines the RBI’s action.
The circular had created huge pushback from both stressed corporates and banks who were strongly opposed to it. Various companies – especially in the power, sugar and fertiliser sectors – had challenged the RBI’s directive as unconstitutional on the ground that it wrongly classified them as willful defaulters, noted the report.
“Their argument was that they were stressed because of external reasons beyond their control. Several defaulters argued that some genuine cases where customer payment was overdue were because of slow processing by government departments.”
On many occasions, they had asked the RBI to roll back or dilute some of the most stringent clauses. The RBI refused, insisting that the new rules will improve the credit culture as it would force banks to deal with NPAs more proactively, leading to a reduction in NPA addition going forward.
The 12 Feb circular had directed lenders to refer loan accounts over Rs 20bn under the Insolvency and Bankruptcy Code (IBC) if they were not resolved within 180 days of default.
The circular imposed a one-day default rule. Banks had to treat a company as a defaulter even if it missed the repayment schedule by a day.
This would not impact the NPA recognition rule. The impact of this circular was to identify stressed assets in the banking system immediately rather than wait for an account to turn NPA over 90 days past default. As soon as there was a default in the borrowers account with any bank, all banks singly or jointly had to initiate steps to cure the default.
The RBI circular had made it mandatory for banks to ensure that a resolution plan was in place within 180 days of default of accounts with exposure of Rs 20bn or more.
The resolution plan could involve regularisation of the account by payment of all overdue by the borrower entity, the sale of the exposures to other investors, changes in ownership and restructuring.
Failing implementation of such a resolution plan, such accounts were to be directed to the National Company Law Tribunal (NCLT) for insolvency proceedings within 15 days.