Though banks invoked strategic debt restructuring in more than 140 cases, they were unable to change ownership even in a handful of cases, the RBI noted
Defending its controversial February 12 circular, the RBI on Thursday brought to the Supreme Court’s notice that none of the petitioners (corporate defaulters) from a variety of industries like power, shipping and sugar could come up with any resolution plan that could be considered by banks. “It is apparent that they don’t have any resolution plans,” the RBI said, referring to the leeway that was available to the firms under the court’s September 2018 order asking the lenders not to act till further orders.
The circular stipulates a one-day default rule on term loans — borrower missing repayment even for a day will be treated a defaulter, banks need to finalise a resolution plan for defaults of over Rs 2,000 crore within the next 180 days, failing which insolvency process will start.
“It is noteworthy that the additional period of 180 days also came to an end on 28.02.2019. Barring 2 or 3 cases which have been resolved and some more cases which have been referred to the NCLT, the position remains the same,” the RBI said.
The RBI said it wanted to address the “serious malady of evergreening of stressed accounts being resorted to by lenders in order to avoid provisioning” as well as “preserve the economic value of assets and enable banks to extend a holding hand to various companies which are under stress”.
According to the central bank, since stressed assets and NPAs in the banking system had reached “unacceptably high levels”, it was incumbent upon it to take urgent measures for their speedy resolution in order to improve the financial health of banks. The gross NPAs ratio of banks, which was 2.35% in March 2011 had increased to 11.46% by March 2018, the RBI told a bench led by justice RF Nariman. The court reserved its orders.
Explaining the rationale behind the February 12 circular, the RBI argued that instead of prescribing specific schemes under its extant guidelines, flexibility had to be provided to the banks to restructure their viable but stressed accounts. Senior counsel Rakesh Dwivedi and counsel Liz Mathews, appearing for RBI, argued that the circular was in the interest of banking policy, the depositors and public interest as well as in the interest of national economy.
Though banks invoked strategic debt restructuring in more than 140 cases, they were unable to change ownership even in a handful of cases, the RBI noted. Under corporate debt restructuring, out of the total 591 approved cases, only 110 succeeded until September 2017. Under the scheme for sustainable structuring of stressed assets (S4A), only 22 cases the restructuring could be implemented from June 2016 to February 2018. As much as 20 out of these 22 borrowers are in default even on the restructured debt, the central bank added.
The February 12 circular has been castigated for providing “one pill for all ills”, a rigid timeline of 180 days; ending all previous instructions; requiring 100% agreement for an RP; for not leaving space for problems faced by individual borrowers on account of external reasons; and for not distinguishing between wilful defaulters and genuine defaulters who suffer on account of severe regulatory issues.
However, the banking regulator said that its revised framework has withdrawn restrictive conditions such as personal guarantee, right of recompense, 50% debt sustainability and has allowed banks to tailor the restructuring package to suit the cash flow projections of the borrower.
Addressing the grievance of the power sector, which contended that RBI had not considered the larger stress in the sector in its February 12 circular, the regulator said that “they are from the beginning aware that the market in the regulated sector and unregulated sectors operate differently to quite an extent”. Even if one assumes that that the RBI can issue directions only in ‘specific cases’, the circular can’t be found fault with, the RBI contended.
The September 2018 ruling by the SC was expected to provide time for bankers to finalise resolution plans for stressed power projects with combined capacity of about 13 giga watts. However, it turned out that Prayagraj Bara power plant and SKS Binjkote (1,200 MW) stations are the only two stressed units to find resolution outside the NCLT within this timeline.