RBI circular to banks on loan defaulters quashed

Mains Paper 3 : issues relating to planning, mobilization of resources |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IBC

Mains level : Effectiveness of regulatory mechanism for stressed assets resolution


News

  • The Hon’ble Supreme Court has struck down a Feb-2018 RBI circular giving lender banks six months to resolve their stressed assets or move under the Insolvency Code against private entities who have defaulted in loans worth over Rs. 2000 crore.

About the RBI circular

  • Through a notification issued on Feb 12, 2018 the RBI laid down a revised framework for the resolution of stressed assets, which replaced all its earlier instructions on the subject.
  • 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.
  • RBI termed it necessary to substitute the existing guidelines with a harmonized and simplified generic framework for resolution of stressed assets.

What did the revised framework replace?

  • The circular went into effect on the same day that it was issued, and all existing schemes for stressed asset resolution were withdrawn with immediate effect.
  • The circular was ostensibly intended to stop the “evergreening” of bad loans the practice of banks providing fresh loans to enable timely repayment by borrowers on existing loans.
  • The RBI warned banks that not adhering to the timelines laid down in the circular, or attempting to evergreen stressed accounts, would attract stringent supervisory and enforcement actions.

Issues with the circular

  • The companies argued that the circular was arbitrary and discriminatory, and therefore, violative of Article 14 of the Constitution.
  • Several companies from the power and shipping sectors had challenged the circular, arguing that the time given by the RBI was not enough to tackle bad debt.
  • The government had earlier asked the RBI to make sector-specific relaxations in the timeline for the implementation of the circular.
  • Power producers, for instance, had argued that the RBI’s ‘one-size-fits-all’ approach was impractical since the sector had to confront external factors that were beyond its control.
  • These factors included the unavailability of coal and gas, and problems arising out of the failure of state governments to honour power purchase agreements.

Impact of SC’s relaxation

  • The order provides immediate relief to companies that have defaulted in repayments, especially those in the power, shipping and sugar sectors.
  • However, many financial sector experts argued that the verdict could delay the process of stressed assets resolution, which had of late picked up pace.
  • Since banks will have the choice of devising resolution plans or going to the National Company Law Tribunal under the IBC, the urgency that the RBI’s rules had introduced in the system could be impacted.
Insolvency and Bankruptcy Code
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