Supreme Court quashes RBI circular on bad debt

New Delhi: The Supreme Court on Tuesday quashed a RBI time bound debt resolution circular. It had directed banks unable to agree upon a resolution plan with any defaulter within 180 days to drag the defaulter into a time bound insolvency process.

“The impugned circular will have to be declared as ultra vires as a whole, and be declared to be of no effect in law,” the court said in its judgment. “All actions taken under the said circular, including actions by which the Insolvency Code has been triggered must fall along with the said circular.”

A spokesman for the RBI declined to comment, saying it had yet to analyse the court order. Several companies had challenged the circular in court arguing the time given by the central bank was insufficient to tackle bad debt. Some had even challenged the validity of the RBI’s directive saying its “one-size-fits-all” did not account for external factors.

The ruling gives relief to several companies, especially power companies, who have defaulted on loans due to issues with coal and gas supplies or problems tied to state governments not honouring power purchase agreements. It also has a bearing on  affected companies in the textile, sugar and, shipping sectors. Some bankers, however, fear the ruling may result in more wrangling between banks and borrowers around soured loans and dent bankruptcy reforms.

‘‘This will once again mean we are back to the old days when banks and companies used to delay debt resolution, with each one trying to buy time,” said one banker who is handling non-performing accounts at a State-run bank, adds Reuters.

However, a partner at a top law firm told the wire agency that Jet’s debt resolution plan might not be derailed. “It is only the punitive action or coercive action under the circular which will get affected by this,” the lawyer said, adds Reuters.

Within hours of the Supreme Court voiding the RBI’s circular, a cautious Finance Minister Arun Jaitley said the central bank would have to see what is required to be done for recoveries of bank loans in the absence of this directive. Earlier, Finance Ministry officials declined to comment on the order and its implications on the banks and their NPAs.

They also refused to comment on alternative loan resolution mechanisms and the fate of those cases that have been referred to NCLT by banks under directions from RBI, but are not yet admitted. The Confederation of All India Traders has welcomed the order as the circular had mandated that banks immediately resolve loans of Rs 2,000 crore and above. The verdict would have a bearing on Rs 2.2 lakh crore of bad loans.

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