Government may direct banks on bad loans resolution

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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.

The Supreme Court on Tuesday quashed RBI's February 12 circular, which prescribed rules for recognising one-day defaults by large corporate and initiating insolvency action as a remedy.

"The verdict along with recent CCEA and union power and commerce ministries' notifications implementing the recommendations of the empowered committee will provide the much- needed respite to all the affected parties and alleviate their stress", Khurana said.

A bench of Justices Rohinton Fali Nariman and Vineet Saran on Tuesday declared the circular unconstitutional and ultra vires while hearing a batch of petitions challenging the circular. "The powers of RBI under Section 35AA and other sections of the Banking Regulation Act, 1949 are, therefore, not under doubt", said Das.

The RBI said that "in view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC)" - under which a resolution plan is supposed to be finalised within 180 days, with a grace period of 90 days - it was necessary "to substitute the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets".

Power, shipping, sugar, infrastructure, telecom, and steel companies were particularly opposed to this notice.

Further still, the circular gave them not more than 180 days to approach a bankruptcy tribunal for the resolution of said loan if the exposure was more than ₹20 billion.

The RBI stands committed to maintain and enhance the momentum of resolution of stressed assets and adherence to credit discipline, he said. "All these options are within the commercial domain of banks.they will still remain answerable to the RBI", Lakshmikumaran & Sridharan Executive Partner Punit Dutt Tyagi said.

While the country needs a more nuanced policy, some say that the intent behind the RBI's circular is correct.

Several companies had challenged the circular in court arguing the time given by the central bank was insufficient to tackle bad debt.

CNBC TV said that the judgment is "bank credit negative", meaning that if defaulters are forgiven for bad debt, banks are the ones at a loss without punitive powers.

The channel also said that the concept of borrowers immediately informing the RBI of their defaulting is a good check and balance system that increases more information about the financial health of the country. The government had earlier asked the RBI to make sector-specific relaxations in the timeline for the implementation of the circular.

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