Back in February 2018, when the Reserve Bank of India introduced its revised framework for resolution of stressed assets in its controversial February 12 circular, the banking sector and beleaguered companies alike were left shaking. The Supreme Court today struck down the circular, declaring it unconstitutional and ultra vires (acting or done beyond one's legal power or authority).
What did the circular say?
The circular completely revamped the rules tackling non-productive assets (NPAs). It came at a time the banking sector's profitability was taking a hit, bad loans has spiralled to a whopping Rs 10 lakh crore, and the PNB scam was beginning to unravel.
"The Reserve Bank of India has issued various instructions aimed at resolution of stressed assets in the economy, including introduction of certain specific schemes at different points of time. In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), it has been decided to substitute the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets", read the circular.
Under the new framework, the apex bank discontinued programmes for banks to restructure their defaulted loans such as corporate debt restructuring (CDR), sustainable structuring of stressed assets (S4A), strategic debt restructuring (SDR), among others, and made the Insolvency and Bankruptcy Code as the main tool to deal with defaulters.
The framework made it mandatory for banks to identify signs of incipient stress in loan accounts and classify stressed assets as Special Mention Account (SMA), immediately on default. Even a single day's default in debt servicing would require reporting to the RBI and implementation of Resolution Plan.
Furthermore, lenders were asked to finalise a resolution plan in case of a default on large accounts of Rs 2,000 crore and above within 180 days, failing which insolvency proceedings would be invoked against the defaulter. Banks, too, would face penalties in case of failure to comply with the guidelines.
Significantly, the RBI asked lenders to weekly report credit information, including classification of an account as special mention account (SMA) to the Central Repository of Information on Large Credits (CRILC) on all borrowers having an aggregate exposure of Rs 5 crore and above.
Some experts, including Krishnan Sitaraman, a senior director at Crisil, hailed the move as long- term positive for the banking sector. The logic was that the revised framework would establish an ecosystem where NPAs would not only get recognised on time but also see faster resolutions- something the previous dispensations like asset restructuring failed to do.
Media reports at the time suggested that around Rs 2 lakh crore worth of stressed loans could possibly land in bankruptcy court as a result of this new framework.
Why was it opposed?
The stringent new norms were criticised in various quarters, including by a parliamentary committee. While the initial brickbats focussed on the fact the circular would further erode banks' profitability as provisions surged, before long beleaguered companies started moving court on the grounds that the circular blanket-termed all defaulters as wilful defaulters when many sectors were under stress due to unforeseen circumstances beyond their control. The power sector, for instance, cited factors such as fuel shortage and regulatory clearances that hit their cash flows and credit rating.
The Independent Power Producers Association of India, Association of Power Producers (APP), the Sugar Manufacturing Association from Tamil Nadu as well as groups representing shipyards and textile makers, among others, had challenged this circular.
What was the RBI's stand?
As recently as mid-March, the RBI steadfastly maintained that there would be no dilution in its stand with regard to February 12 circular. "It is reiterated that the Reserve Bank maintains its stand on all aspects of the Framework as has been consistently articulated in its communications, including the clarification given during the post-monetary policy press conference on February 7, 2019," the central bank said in a statement amid reports that it was beginning to toe the government line and was considering relaxation of some of the norms.
What will happen now?
The Supreme Court held that reference under IBC now has to be on case-specific basis and with authorisation of central government, The Economic Times reported. All the cases that had already been referred to bankruptcy court in line with the circular will now be reportedly reversed.
(Edited by: Sushmita Choudhury)