India's RBI lost a bad debt battle, not the war

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

This also provides the much-needed relief to power companies like RattanIndia, GMR, GVK, IL&FS and Coastal Energen among others which had been taken to NCLTs under the RBI circular, he said.

The verdict comes more than a year after the RBI released a circular on February 12th, 2018 that mandated banks to recognise loans of at least ₹50 million as having gone bad even in the event of a one-day default. The quashing of the RBI's diktat has, however, turned the clock back on resolution of stressed assets.

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went into effect on the same day that it was issued, and all existing schemes for stressed asset resolution were withdrawn with immediate effect. Therefore, in an effort to warn banks and borrowers that they will be penalised for defaulting on loans, the RBI issued a controversial circular. The circular had forced lenders to act effectively on soured loans, pushing promoters of defaulting businesses to either opt for resolution, or file for insolvency.

Now, the RBI can ask for a review from the SC on whether its circular can still work without the specific clauses that the court disagreed with.

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

The RBI governor said on Thursday the Supreme Court had not doubted the powers of the central bank under Section 35AA.

The power firms alleged that the central bank's notification was based on a "one-size-fits-all" approach and it does not take to account factors such as the reasons for non-payment.

Under the circular, companies which were unable to implement a resolution plan by August 27, 2018, were scheduled to be referred to NCLT under IBC by September 11. Similar petitions were moved at the Madras High Court and the Delhi High Court.

"The RBI stands committed to maintain and enhance the momentum of resolution of stressed assets and adherence to credit discipline".

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

The decision caused panic for many companies, in particular those in the power sector. However, many financial sector experts argued that the verdict could delay the process of stressed assets resolution, which had of late picked up pace. It required banks to initiate resolution proceedings with defaulting companies in order to restructure loans within 180 days from the day they default.

"Voiding of the February 12 circular is credit negative for Indian banks".

Vishrov Mukerjee, Partner, J Sagar Associates said after the Supreme Court judgment, the RBI may have to issue revised guidelines or circulars for the restructuring of stressed assets. "But, with the voiding, this may now have to be watered down", he said.

The Indian Banks Association had sought a relaxation in the RBI's norms for infrastructure and power companies.

The clarity from the RBI Governor came as a relief as there was general apprehension about the fate of the ongoing insolvency cases. Since banks have already provisioned for likely loan losses, that process was unlikely to be reversed, a top banker with a public sector bank said. I would imagine there could be an impact on the cases that are outside it. "Provisioning will keep increasing for banks for the time being, with or without the February 12 circular", the banker, who declined to be named, said.

Under the nullified RBI circular, banks would have had to finalise a resolution plan for the airline by June if they wanted to avoid insolvency proceedings.

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

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