The resolution of stressed loans where lenders’ aggregate exposure is ₹2,000 crore or more could get delayed as the Supreme Court declared the Reserve Bank of India’s February 12, 2018 circular on revised framework for resolution of stressed assets ultra vires.

The judgment comes at a time when banks have set much store by the circular for making recoveries from large stressed accounts. Ultra vires means beyond the powers.

As per the framework, banks have to report even a one-day default and draw up resolution plans thereupon so that the borrower is not in default as on 180th day from the date of such default.

If a resolution plan in respect of such large accounts is not implemented as per the specified timelines, banks have to file insolvency application, singly or jointly, under the Insolvency and Bankruptcy Code, 2016 (IBC) within 15 days from the expiry of the said timeline. According to credit rating agency ICRA, the total estimated debt impacted because of the circular was ₹3.8 lakh-crore across 70 large borrowers, of which ₹2 lakhcrore, across 34 borrowers, was in the power sector. Further, 92 per cent of this debt was classified as non-performing by banks as on March 31, 2018.

Credit negative for banks

Srikanth Vadlamani, Vice-President, Financial Institutions Group, Moody’s Investors Service, said voiding of the February 12 circular is credit negative for Indian banks.

“The circular had significantly tightened stressed loan recognition and resolution for large borrowers. But, with the voiding, this may now have to be watered down.

“The resolution of stressed loans impacted by the circular will be further delayed as the process may have to be started afresh,” said Vadlamani.

BK Divakara, former Executive Director, Central Bank of India, observed that promoters of most of the large stressed companies will be happy as they have been asking for restructuring. But whether bankers will be agreeable to restructuring remains to be seen as the quality of the assets would have deteriorated with the passage of time.

“Since the circular stands withdrawn, the earlier restructuring schemes of RBI may get restored. So, restructuring will be permitted.

“The circular’s single-day default norm, which was very harsh, will go. So, corporates are getting some time. But payments by them to banks could get prolonged to 89 days from the due date. With the one-day default norm, borrowers were paying promptly,” explained Divakara.

Anil Gupta, Vice-President & Sector Head - Financial Sector Ratings, ICRA, said the February 12 circular removed the discretion with banks on resolution on stressed accounts by requiring them to compulsorily implement a resolution plan in a time-bound manner or refer the borrowers under the IBC for resolution.

Option for banks

“Despite quashing of the circular, banks will continue to have the option of referring such defaulting borrowers under the IBC, in case the resolution plans fail….Banks have made provisions of over 25-40 per cent on these (large stressed) accounts and hence should not impact the reported asset quality of profitability numbers. However, the resolution process, which was expected to be expedited, may get delayed,” said Gupta.

A banking expert, who did not wish to be named, said the judgment could also impact existing cases under the National Company Law Tribunal where the borrowers may choose to exit the case. With the general elections and formation of government, it is unlikely that any legislative move — if at all any — will be brought until December this year,” he added.

“Though it is a setback to the IBC process, which focusses on time-bound resolution of cases, it is positive for genuine borrowers under stress due to prevailing conditions.

“Lenders who understand the real conditions of the borrowers will be able to solve these cases outside the NCLT and reduce higher haircuts on their exposure to these companies. However, the resolution will be delayed further,” said Mangesh Kulkarni, Research Analyst, Almondz Global Securities.

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