The Supreme Court on Tuesday struck down as ultra vires, the controversial circular issued by Reserve Bank of India (RBI) that mandated resolution of loans of Rs2,000 crore and above even for a default of a single day within the window of 180 days.
The RBI circular had said that in the pre-insolvency and bankruptcy code (IBC) stage, the moment a commercial entity is in default on a loan of Rs2,000 crore or more even for a day within 180 days default, the bank would initiate steps for resolving, including restructuring the loan. RBI’s previous guidelines had given banks the freedom to initiate resolution process after 60 days of default or within 240 days.
Pronouncing the judgement on a batch of petitions by the industries—power, fertiliser and sugar—challenging RBI's 12 February 2018 circular, a bench of Justice Rohinton Fali Nariman and Justice Vineet Saran said, "We have declared RBI circular ultra vires."
The SC verdict would have a bearing on Rs2.2 lakh crore of bad loans. It also raises questions on the central bank’s authority on issuing orders to banks for initiating loan recovery after a default. The Indian government through an amendment in the Banking Regulation Act has authorised RBI to issue directions to lenders for proceeding under IBC.
Power, shipping and sugar companies have challenged RBI's 12 February 2018 circular which has identified about 30 companies that have loans over Rs2,000 crore and are stressed. Many of them were power companies and they have already challenged the RBI's circular in various courts.
The regulated sector companies of fertiliser, power and sugar had contended that their prices are regulated by the government and they do not get paid on time and, thus, they are not able to pay the banks on schedule and they are not wilful defaulters and can't be treated as such.
They have contended that under IBC the resolution plan gives then 270 days but the RBI circular has reduced it to 180.
As many as 34 power companies have accumulated Rs1.4 lakh crore of non-performing assets (NPAs) for Indian banks while 41 corporates across sectors, including those from infrastructure, textiles, telecom, sugar, steel, energy, power and fertilisers have Rs84,000 crore piled up NPAs which have taken the bad loan total to astronomical Rs2.24 lakh crore.
Quoting a report of the 37th standing committee on energy giving NPA details of 34 power plants, the petitioners told the apex court that these plants, which have number of banks ranging from 2 to 19, have accumulated over Rs1.40 lakh crore.
These power companies were seeking Supreme Court's intervention in setting aside or quashing an RBI order of 12 February 2018 where the apex bank laid down strict norms for NPA resolutions within 180 days, among other rules.
Earlier this month, RBI defended its 12 February 2018 circular, and told the SC that intention behind the circular was to give banks more powers in resolving stress and the one day default rule is to ensure banks and borrowers put a risk management framework in place.
The one day default rule of RBI states if a defaulter fails to pay even one day after the deadline of loan payment, then banks have to come up with a resolution plans and, if they do not approve the resolution plan within 180 days, then the banks will have to take the company to insolvency. This rule was mostly criticised by companies.
The prominent corporates where payments are due are Adani Power Maharashtra (Rs9,463.29 crore), Damodar Valley Corp (Rs9,756.42 crore), Jaiprakash Power Ventures (Rs8,719.16 crore), KSK Mahanadi Power Co (Rs14,165.12 crore), Jindal Thermal Power (Rs5,594.21 crore), Prayagraj Power Generation (Rs9,883.28 crore), Jaiprakash Power Ventures (Rs8,719.16 crore), GNR Chhatishgarh Energy (Rs5,325.28 crore) and DB Power (Rs5,930.56 crore) among a host of others.
Among the consolidated NPA list of other corporates, VOVL, formerly known as Videocon Oil Ventures Ltd, having a 17-bank consortium of lenders, owes Rs21,657.54 crore to them. Matrix Fertiliser and Chemicals owes 11 bankers Rs4,135.12 crore. Essar Bulk Terminal, an infra company, owes Rs1,088.82 crore and Rolta India has a debt of Rs3,400 crore.
The new framework of RBI prescribed a strict 180-day timeline over which banks are required to unanimously agree on the resolution plan, failing which the stressed account would have to be referred for resolution under the IBC.
Power companies argued that the circular would push even power assets that were close to achieving loan restructuring into insolvency.
Power ministry officials also spoke out against the 12 February 2018 circular seeking some relaxation in norms, especially with respect to the one-day default rule, attributing the stress in the sector to delayed payments by electricity distribution companies of India (discoms), lack of power purchase agreements and irregular coal supply.
