New Delhi: The Supreme Court’s decision to strike down the Reserve Bank of India (RBI)’s controversial 12 February 2018 circular will provide an immediate reprieve to banks and firms in stressed sectors like power, but it could hurt the central bank’s entire regulatory framework governing bad debts, analysts said.
On Tuesday, a two-judge Supreme Court bench held the circular that focused on quick recognition of bad debts to be “ultra vires” or beyond one’s legal power.
The stringent circular 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.
The circular applied to all accounts with a loan exposure of more than Rs 2,000 crore, and directed banks to draw up a resolution plan failing which the cases had to be moved to the bankruptcy process.
“The judgment will provide a temporary relief for banks as it will delay the accelerated recognition of bad debts that was currently set into process,” said a banking analyst with a brokerage firm who did not wish to be identified as the final court judgment wasn’t yet available.
“It will also provide a temporary relief to many companies. But eventually, banks will by themselves take a call on how to deal with stressed accounts,” said the analyst.
“In effect, instead of finding the solution, the judgment will only delay the NPA (non-performing assets) recognition and solution.”
Also read: India has the second worst NPA ratio among large economies
‘RBI was within rights’
Indian banks’ NPA as a percentage of advances is expected to be at 10.3 per cent as of March 2019, from 11.5 per cent in March 2018, according to RBI’s financial stability report.
The central bank will have to now take a call on its future course of action, said M.R. Umarji, former legal advisor to Indian Banks’ Association, adding that RBI as the regulator of state-run banks was within its rights to direct the banks for early recognition of NPA.
“But another line of thought was that the banks and their boards should be taking the business decision of when to take a firm to the bankruptcy process,” said Umarji.
Sumant Batra, head, corporate insolvency and corporate advisory, Kesar Dass B & Associates, said the ruling will encourage voluntary restructuring of firms and will give banks greater freedom to decide which cases they need to file for restructuring.
It will not be a setback to the insolvency process, said Batra.
“To the extent it provided for stringent provisioning norms and directed banks to file insolvency cases in the event of the failure of the resolution plan within a specified framework, the decision to set it aside was justified. It was too harsh,” he said, adding that the rest of the circular should have been left to the RBI to implement.
Also read: RBI on its own cannot solve the NPA crisis in Indian banking sector