ugc_banner

Supreme Court quashes RBI directive on resolving bad debt

Reuters
Mumbai, Maharashtra, IndiaUpdated: Apr 02, 2019, 10:11 PM IST
main img
File photo: The Supreme Court of India. Photograph:(Reuters)

Story highlights

The Supreme Court said the RBI's circular from Feb 12 last year on how banks should handle defaulters was 'ultra vires', essentially meaning the central bank acted beyond its powers

India's Supreme Court on Tuesday quashed a Reserve Bank of India circular on resolving bad debt, providing relief for some major corporate defaulters but throwing the country's still nascent bankruptcy regime into question.

The Supreme Court said the RBI's circular from Feb. 12 last year on how banks should handle defaulters was "ultra vires", essentially meaning the central bank acted beyond its powers.

The RBI circular 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 judgement. "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 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 provides a breather for companies in the sugar, shipping, infrastructure and textile sectors which were under pressure, said several bankers and lawyers.

"If the RBI wants to (now) take action they have to go case specific and then initiate action. But you can't do a generic across the board cookie-cutter approach," said Amit Kapur, of law firm J. Sagar Associates, which represented several power companies in the court. The RBI may now have to come up with a new circular, he said.

BACKWARD STEP

Some bankers, however, fear the ruling may result in more wrangling between banks and borrowers around soured loans and dent bankruptcy reforms.

Foreign investors have often complained about the tardy pace of bad debt resolution in India, which has held back billions of dollars of investment in the country.

Indian banks and financial institutions currently hold total bad debt of over 10 trillion rupees ($146 billion) and this has also affected their ability to lend and spur economic growth.

"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 handling non-performing accounts at a state-run bank.

Lawyers and bankers also agree the ruling could delay an already slow debt resolution process and that it may hurt banks' earnings.

Global rating agency Moody's said the judgement was credit negative for Indian banks and warned it could further delay the resolution process of bad debt in India.

Tuesday's ruling also raises questions around the validity of a debt resolution plan at beleaguered carrier Jet Airways as bankers said that a part of the resolution process was based on processes laid out in the RBI's Feb. 12 circular that the court has now quashed in its entirety.

However, a partner at a top law firm in India told Reuters that Jet's debt resolution plan might not be derailed as lenders could have taken the decision even without the central bank's circular.

"It is only the punitive action or coercive action under the circular which will get affected by this," the lawyer said. "The banks could have contractually, restructured loans whether there was an RBI circular or not," he said.