ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Bad Debt Resolution Hits Judicial Roadblock

With the Supreme Court having declared ultra vires the Reserve Bank of India circular directing banks to pursue bad debt resolution at any cost, the process of making banks alone pay for all-round errors has come to an end. The Court has required the government to specifically authorise each resolution exercise and not delegate blanket authority to theRBI. This would matter in cases such as in the power sector where a misplaced privatisation policy explains the non-performing assets, which the government would now have to take into account. The Court’s order also makes it difficult for theRBI to pretend that it had no role in the generation of theNPAs.

In a surprising and disruptive turn in the Supreme Court, the Reserve Bank of India’s (RBI) effort at penalising corporate defaulters and cleaning the books of India’s commercial banks has hit another roadblock. In early April, the Court struck down a circular issued by the RBI on 12 February 2018, which required banks to identify a loan account as a Special Mention Account (SMA) (Stage 1), even if the period of default on payments is one day. In addition, if the loan to a defaulting debtor is to the tune of ₹ 2,000 crore or more, the banks were required to agree on a resolution plan within 180 days as of 1 March 2018, if the default had already occurred or 180 days from the date of default, if that were later. A resolution plan required the agreement of all creditors. If a resolution plan cannot be agreed upon within that time frame, the company has to be taken to the bankruptcy court established under the terms of the Insolvency and Bankruptcy Code (IBC), 2016 within 15 days of completion of the specified period.

According to the RBI, the circular was based on the powers conferred on it by Sections 35A of the Banking Regulation Act as amended to include Sections 35AA and 35AB, besides an order from the finance ministry giving it blanket resolution powers. Despite the delays relative to prescribed timelines that this resolution process has experienced in practice, the process itself was seen as faster and more effective (in terms of the proportion of outstanding debt recovered) than the Debt Recovery Tribunals (DRTs), the Lok Adalats and the powers conferred by the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002, which were the means of recovery earlier. As a result, it was expected that the new resolution process would help resolve the bad debt problem with lower volumes of recapitalisation support from a cash-strapped government, and get credit moving once again. These expectations were only partially met, with the haircut required to be taken by the banks in some cases proving to be substantial.

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Updated On : 12th Apr, 2019

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