Published: Сб, Апреля 06, 2019
Business | By Eloise Houston

RBI to issue revised circular on stressed assets resolution

RBI to issue revised circular on stressed assets resolution

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

However, since the RBI in June 2017 issued the names of 12 specific defaulters, including Essar Steel, Bhushan Power and JP Infra, accounting for 25 per cent of the total bad debt for resolution under the Insolvency and Bankruptcy Code (IBC), the Supreme Court order would not impact these cases nor would it impact its second list of 29 defaulters issued in August 2017.

"The RBI's powers are not under doubt", Governor Shaktikanta Das said in Mumbai, while speaking to the press after announcing a cut in the RBI's benchmark interest rate.

Following the judgment on the Reserve Bank of India (RBI) circular, banks and borrowers will regain flexibility in resolving stressed loans. "Our (SBI's) approach to the resolution of stressed assets, which is a proactive approach, recognises early the asset and takes corrective action... there will be no change in that and the discipline which has come in the market around payment, I don't think that is going to be diluted in any manner", he said.

The decision rendered today comes in a batch of petitions, transferred to the Supreme Court from various High Courts where the RBI's circular of February 12, 2018, was challenged.

Under the nullified RBI circular, banks would have had to finalise a resolution plan for the airline by June if they wanted to avoid insolvency proceedings.

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The circular 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.

Now, the RBI can ask for a review from the SC on whether its circular can still work without the specific clauses that the court disagreed with.

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 honoring power purchase agreements.

Under this plan, stressed power projects would be nursed back to health through equity support from banks and power sector lending agencies and operational support from an asset management company or power generating entity like NTPC.

"This is credit negative for Indian banks as it will weaken stressed loan recognition and resolution for large borrowers, and delay the resolution process of some existing large non-performing loans (NPLs)", Moody's Investors Service said in a research note. "But, with the voiding, this may now have to be watered down", he said. Since banks have already provisioned for likely loan losses, that process was unlikely to be reversed, a top banker with a public sector bank said.

"Incremental NPA formation is estimated to have halved to 3.7 per cent (of opening net advances) for the full year ended March 31, 2019, compared with 7.4 per cent in fiscal 2018", Financial Sector Ratings Director Rama Patel said.

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