Published: Sat, April 06, 2019
Markets | By Erika Turner

SC order won't impact major default cases: RBI chief

SC order won't impact major default cases: RBI chief

The Supreme Court today declared the Reserve Bank of India Circular of February 12 relating to loan repayment of stressed accounts ultra vires.

Reserve Bank of India (RBI) Governor Shaktikanta Das said on Thursday that the recent Supreme Court ruling did not take away the powers of the central bank, nor would it impact the major default cases undergoing insolvency proceedings.

The petitioners argued that the RBI's order was a one-size-fit-all approach that was not nuanced.

This also provides the much-needed relief to power companies like RattanIndia, GMR, GVK, IL&FS and Coastal Energen among others which had been taken to NCLTs under the RBI circular, he said. The RBI warned banks that not adhering to the timelines laid down in the circular, or attempting to evergreen stressed accounts, would attract stringent supervisory and enforcement actions.

"This apart, the resolution process is in any case subjected to regulatory risks as exemplified in the case of the Prayagraj Power asset, where the regulator has given a recent directive for a discount in PPA tariff while allowing the shareholding change approval for the same", he said.

The rationale behind the RBI's February 12th circular was to tighten the noose on cash-strapped companies and force banks to account for bad loans immediately. The government had earlier asked the RBI to make sector-specific relaxations in the timeline for the implementation of the circular. These factors included the unavailability of coal and gas, and problems arising out of the failure of state governments to honour power purchase agreements.

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Under the circular, companies which were unable to implement a resolution plan by August 27, 2018, were scheduled to be referred to NCLT under IBC by September 11.

Power, shipping, sugar, infrastructure, telecom, and steel companies were particularly opposed to this notice. Hence, the voiding of the February 12 circular is credit negative, it said.

The RBI's circular led 34 power producers to drag the regulator first to the Allahabad High Court, which asked RBI to offer some respite, but the RBI did not budge and challenged it in the Supreme Court previous year.

Experts have said quashing of the February 12 circular, could lead to delays in the resolution of stressed assets. 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. As of March 31, 2018, 92% of this debt had been classified as non-performing, and banks have made provisions of over 25-40% on these accounts, ICRA said.

Das said the central bank would have to comply with the directions of the Supreme Court and act accordingly, but, would remain committed on enhancing the momentum of resolution of stressed assets and adherence to credit discipline. However, the resolution process, which was expected to be expedited, may get delayed, Gupta said.

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