SC order impact: RBI may revise framework for debt resolution

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Published: April 4, 2019 3:34:20 AM

Of course, the high-profile insolvency cases such as Essar Steel, Bhushan Power and Steel and Jaypee Infratech, which had reached the IBC arena before the RBI issued the contentious circular, won’t be impacted by Tuesday’s SC order.

Rating agency Icra had earlier said the RBI circular required as many as 70 large corporate accounts with loans worth `3.8 lakh crore to come up for IBC resolution by September 1, 2018.

The Reserve Bank of India (RBI) is likely to come out with a revised framework on stressed asset resolution soon and some of the earlier loan restructuring schemes such as S4A are expected to make a comeback, after its February 12, 2018 circular was declared ultra vires by the Supreme Court on Tuesday, a source told FE.
The apex court order, however, didn’t limit the government’s powers to give directions to public sector banks on bad loans, nor did it question the validity of the Section 35AA of the Banking Regulation Act, another source said. The RBI is learnt to be studying the judgment. “A revised framework is needed to provide direction to bankers as to how to deal with bad loan cases,” the source said.

The SC has held that the Section 35AA introduced by the government in the Banking Regulation Act in early May 2017 (which the RBI used to issue the circular) allows directions that “can only be in respect of specific defaults by specific debtors” and not for debtors generally. It has also viewed that specific cases of default can be recommended for proceedings under the Insolvency and Bankruptcy Code (IBC) only with the central government’s authorisation.
Scrapping earlier debt-restructuring schemes like CDR, SDR and S4A, the RBI’s February 12 circular stipulated a one-day default rule on term loans, mandating that a borrower who missed repayment even for a day be treated as a ‘defaulter’. It added that banks would have to finalise a resolution plan for such defaults of over `2,000 crore within 180 days, and if they failed in doing so, the account would be subject to the IBC process.

Among the immediate beneficiaries of the SC order are promoters of nearly three dozen stressed power sector assets with a combined capacity of over 40,000 MW and a debt exposure of some `2 lakh crore and those of a clutch of sugar and shipping firms. Rating agency Icra had earlier said the RBI circular required as many as 70 large corporate accounts with loans worth `3.8 lakh crore to come up for IBC resolution by September 1, 2018.

The SC ruling will provide relief to promoters of even those firms that have already been taken by lenders to the National Company Law Tribunal (NCLT) under the RBI circular including the cases admitted by the tribunal — some power assets of RattanIndia, GMR, GVK, ILFS and Coastal Energen are in this category.
Of course, the high-profile insolvency cases such as Essar Steel, Bhushan Power and Steel and Jaypee Infratech, which had reached the IBC arena before the RBI issued the contentious circular, won’t be impacted by Tuesday’s SC order.

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