A man walks past the Reserve Bank of India headquarters in Mumbai | Shashank Parade/ PTI
Reserve Bank of India headquarters in Mumbai | PTI
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New Delhi: In an indication that firms in stressed sectors like power and sugar may have received only a short-term reprieve after the Supreme Court quashed the central bank’s 12 February 2018 circular, the Reserve Bank of India (RBI) Thursday said it will issue a revised circular for banks to deal with stressed assets.

RBI governor Shaktikanta Das said the circular will be issued without any “undue delay”, saying the central bank “stands committed to maintain the momentum of resolution of stressed assets and credit discipline”.

“…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.

Das’ comments come two days after a two-judge Supreme Court bench held the 12 February circular ‘ultra vires’ with respect to Section 35AA of the Banking Regulation Act. The court held that the specific provision permitted the central bank to intervene in specific default cases but the 12 February circular dealt with treatment of such defaults in an overarching manner.

The RBI circular was applicable on all accounts with a loan exposure of more than Rs 2,000 crore, and directed banks to draw up a resolution plan for defaulting accounts failing which they had to be moved to the bankruptcy process.

‘Powers not under doubt’

The RBI governor said the Supreme Court judgment does not raise any doubts on the central bank’s powers and only mandates the RBI to exercise its powers under Section 35AA “in respect of specific defaults by specific debtors”.

“The powers of RBI under Section 35AA and other sections of the Banking Regulation Act, 1949 are, therefore, not under doubt,” he said.

Section 35AA, introduced through amendments to the Banking Regulation Act in 2017, states, “The Central Government may by order authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.”

The two-judge bench of Justices Rohinton Nariman and Vineet Saran ruled: “Thus, it is clear that directions that can be issued under Section 35AA can only be in respect of specific defaults by specific debtors… Thus, any directions which are in respect of debtors generally, would be ultra vires Section 35AA.”

The 12 February circular, termed as stringent by both banks and borrowers, had sought to streamline the way banks classify bad debts and force banks to take stressed accounts into the bankruptcy framework in a time-bound manner.

This had forced banks to make higher provisioning for their debts and became a major point of contention between the government, the majority owner of most of these banks, and the RBI. Doing away with all existing restructuring schemes, the RBI forced banks to recognise accounts that defaulted on payment of principal or interest even by a day.

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