SC’s move on RBI’s Feb 12 circular may pose fresh trouble for banks; Moody’s explains how

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Published: April 2, 2019 5:44:02 PM

Supreme Court’s verdict declaring RBI’s February 12 circular as unconstitutional is credit negative for the banks, said a global rating agency.

India to grow at 7.3 pc in 2019, 2020: Moody'sEarlier today, the apex court declared the RBI 12 February order ultra vire.

Supreme Court’s verdict declaring RBI’s February 12 circular as unconstitutional is credit negative for the banks, said a global rating agency. Following this setback to the Insolvency and Bankruptcy Code (IBC), which aims to clean up banks’ massive NPAs, the resolution of the stressed loans impacted by the circular may get further delayed as process has to start all over again, Reuters reported citing Moody’s Investors Service as saying.

The circular had significantly tightened stressed loan recognition and resolution for large borrowers. With striking down of the circular, this may now have to be watered down, the agency said.

Also read: Rupee-dollar swap: How RBI’s second liquidity push may boost economy, ensure transmission of rates

Earlier today, the apex court declared the RBI 12 February order ultra vire. The central bank’s RBI’s 12 February circular had ruled that banks and lenders refer any loan account over Rs 2,000 crore to IBC if it is not resolved within 180 days of default.

Even as many advocates, bankers and power companies cheered the Supreme Court judgement, a few experts said that the judgement is a one step back for banks as the loan discipline would now take a back seat.

According to the circular, lenders had to classify a loan account as stressed if there was even a day of default. The bankers had to mandatorily refer all accounts with over Rs 2,000 crore loans to the National Company Law Tribunal (NCLT) or the bankruptcy court if they failed to resolve the problem within 180 days of default.

Lenders were supposed to file an insolvency application under the IBC 2016 within 15 days of the completion of the 180-day deadline.

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