Court Fire-Bombs Banking Discipline–Economic Times

The Supreme Court’s ruling quashing the RBI’s February 12 circular is unfortunate. It is a setback for banking and the resolution of bad loans. Indian promoters have long reckoned that if they owe money to the banks, it’s the banks’ problem. The circular had said that a loan must be declared stressed if its servicing is overdue by one day. And if a resolution is not arrived at within 180 days, if the loan is of Rs 2,000 crore or more, the lender should refer it to the bankruptcy court under the Insolvency and Bankruptcy Code (IBC). Fear of bankruptcy has been triggering repayment. The SC’s ruling erodes this.

The judgment, by a Rohinton Nariman-led bench, declared the circular ultra-vires, saying that Section 35AA of the Banking Regulation Act does not empower the RBI to issue a generic mandate to wield IBC. The court also held that the reference under the IBC has to be on a case-specific basis and with the authorisation of the Centre.

So, all cases filed under the IBC, citing the circular, will be declared “non est”. However, banks will have the leeway still to use the IBC route. That is neither here nor there. The SC’s ruling will cheer the power sector, which has been claiming, with justification, that its woes are in special class, resulting from State action, such as cancellation of coal blocks, absent power purchase agreements, and bankrupt power distribution utilities that do not pay for the power they purchase.

The special case of power warrants special action, as stems from absent political will to make consumers pay for the power that they consume. Putting together patient capital to buy out the assets and hold on to them till the political resolve to fix power materialises is the solution. Buyout funds set up by banks, for example, can acquire these stressed assets. This does not warrant upending the entire insolvency process.

via Court Fire-Bombs Banking Discipline

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