RBI circular to banks on loan defaulters quashed

• The Supreme Court on Tuesday quashed RBI’s 12 February circular that had set strict norms for bad loan resolution, easing the concerns of some debt-laden companies and upending India’s fledgling bankruptcy process.

• A two judge-bench comprising justices Rohinton F. Nariman and Vineet Saran said the Reserve Bank of India (RBI) acted beyond its powers in issuing the 12 February 2018 circular. “We have declared the RBI circular ultra vires,” Nariman said.

• The RBI circular directed banks to refer defaulters to bankruptcy courts if they were unable to find a resolution plan within 180 days for stressed accounts where the outstanding amount was more than ₹2,000 crore.

Key highlights by the SCs judgment

• Supreme Court judgement said The Banking Regulation Act, 1937, allows banks to initiate insolvency when there is authorization from the central government or when RBI gives directions to banks for specific default cases.

• RBI didn’t respond to a request seeking comment till the time of publishing this story.

• There is little clarity on whether the central bank will now come up with a fresh policy for banks to tackle the mounting bad debts on their balance sheets. RBI may throw some light on its plans when it announces the monetary policy on 4 April.

• “RBI will have to come up with a new restructuring framework following the court order. Lenders are now free to initiate fresh bankruptcy proceedings against companies, which were otherwise mandatorily referred for insolvency resolution under the circular,” said L. Viswanathan, partner at Cyril Amarchand Mangaldas.

• The Supreme Court order gives many corporate defaulters the breathing space they were looking for, saving them from having to submit to a time-bound insolvency process—at least for the time being. Many cases already submitted to insolvency courts under the circular also may get a fresh lease of life. At the same time, banks will now be free to pursue insolvency proceedings against many defaulting companies—especially power companies—which were put on hold because of the Supreme Court hearings.

• The court said provisions of Section 45L(3) of the RBI Act (power of RBI to call for information from financial institutions and to give directions) were not adhered to in framing the Feb 12 circular.

• “The impugned circular nowhere says that the RBI has had due regard to the conditions in which and the objects for which such institutions have been established, their statutory responsibilities, and the effect the business of such financial institutions is likely to have on trends in the money and capital markets,” the order said.

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Mains Paper 3 : issues relating to planning, mobilization of resources |

Prelims level : IBC

Mains level : Effectiveness of regulatory mechanism for stressed assets resolution

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