A huge setback

By striking down the RBI’s February 2018 circular that mandated banks to draw up a resolution plan within 180 days of default or file for insolvency under IBC, the Supreme Court has delivered a body blow to the clean-up efforts currently underway in the banking system. After all, the growing concerns over the NPA mess being brushed under the carpet by banks in the guise of various restructuring schemes, were not unfounded. The startling pace at which bad loans started to pile up in the first nine months of the 2018 fiscal despite the massive clean up after the RBI’s asset quality review in December 2015, had led the regulator to scrap all restructuring schemes — CDR, SDR, S4A or 5/25 — and nudge banks to hasten resolution of stressed assets. The quashing of the RBI’s diktat has, however, turned the clock back on resolution of stressed assets. Proceedings initiated by banks pursuant to the RBI’s circular face an uncertain future. While banks can use their own discretion to proceed under IBC on a case-to-case basis, past experience suggests that a proactive move by lenders is unlikely. The perennial issues of evergreening the NPA problem and banks dragging their feet on decision making and taking relevant haircuts could come back to haunt the sector.

But more importantly, the Supreme Court’s order undermines the RBI’s position as an independent regulator. The Allahabad High Court ruling that had denied interim relief to power companies from the RBI’s February circular had rightly recognised ‘the position of pre-eminence that RBI enjoys by virtue of being the central bank of the country”. It had also pointed to the intent of the government in the amendment of Section 35A of the Banking Regulation Act, empowering the RBI to deal with the subject of stressed assets. The Supreme Court has instead — on a technicality — struck down the February circular as being ‘ultra vires’ (or beyond the legal ambit) vis-a-vis Section 35 AA, under which the RBI issued the circular. The Supreme Court has ruled that when resolution through IBC is to be effected, the specific power granted by Section 35AA can alone be availed by the RBI, which requires the authorisation of the Central Government. Also, directions can be issued only in respect of specific defaults by specific debtors — directions in respect of debtors generally, would be ultra vires Section 35AA. Also, Section 35 AB that allows the RBI to issue directions to banks for resolution has to be de hors (outside of) IBC.

Aside from opening up a Pandora’s box on banks’ future actions on stressed assets and raising questions on the RBI’s powers to issue directions to banks, the Supreme Court’s ruling does little to address the fate of the 34 identified stressed power projects, with an outstanding debt of about ₹2 lakh crore. Structural issues plaguing the power sector will continue to dog the resolution of these assets, whether under IBC or outside.

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