Monday, 22 July, 2019

Supreme Court quashes RBI's debt resolution circular, says it is unconstitutional

India's Supreme Court order against the RBI will be a huge relief for 75 borrowers with loans worth over ₹2.4 trillion Supreme Court quashes RBI's debt resolution circular, says it is unconstitutional
Ginger Lawrence | 06 April, 2019, 10:56

(Archive)What was the Reserve Bank of India's (RBI's) so-called "February 12 circular"?

How did the matter reach the Supreme Court, and what did the court rule?

India's Supreme Court on Tuesday quashed a Reserve Bank of India circular on resolving bad debt, providing relief for some major corporate defaulters but throwing India's nascent bankruptcy regime into question.

Power companies had challenged the circular in court arguing that the sector was suffering due to external factors like non-availability of fuel and non-payment of dues and referring the power assets to the insolvency and bankruptcy code would result in severe value erosion unless the systemic issues were not addressed.

So, what impact will Tuesday's Supreme Court order have?

"The resolution of stressed loans impacted by the circular will be further delayed as the process may have to be started afresh", Srikanth Vadlamani, vice-president, Financial Institutions Group, Moody's Investors Service, said.

"The verdict along with recent CCEA and union power and commerce ministries' notifications implementing the recommendations of the empowered committee will provide the much- needed respite to all the affected parties and alleviate their stress", Khurana said.

"... RBI will take necessary steps, including issuance of a revised circular, as may be necessary, for expeditious and effective resolution of stressed assets", Das said at a press conference held to announce the monetary policy decisions. But with the voiding, this may now have to be watered down.

Named the most profitable company in the world
In their first-ever grade assessment for Aramco, Fitch issued the firm an A+ rating, while Moody's gave the company it's A1 rating.

The clarity from the RBI Governor came as a relief as there was general apprehension about the fate of the ongoing insolvency cases.

"The court order should not prima facie impact the cases in NCLT".

"If the RBI wants to (now) take action they have to go case specific and then initiate action". The provisioning requirement for banks do not change as it's already over a year since the February 12 circular.

RBI keeps a capital buffer of over Rs 9.4 lakh crore now, which a section in the government feels is too high and thus should be parted with for better productive deployment like funding the cash-starved state-run banks or cash-crunched power distribution companies.

The agency had also said 92 percent of this debt were classified as NPAs by banks as of March 2018 and also made provisions of over 25-40 percent on these accounts.

As per the February 12, 2018 RBI circular, banks had to recognise even one-day default in loans of Rs 2,000 crore and above as non-performing and allow a window of 180 days to resolve the stressed accounts, failing which they had to be sent to bankruptcy courts.

"However, Crisil said: "... a return to the pre-IBC era is not expected".