Pedestrians walk past the RBI headquarters in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Monetary Policy: RBI Mulls Revised Guidelines On Restructuring Loans

The Reserve Bank of India is considering to release a revised set of guidelines on restructuring loans after the Supreme Court decided to strike down its February 2018 circular on stressed assets, Governor Shaktikanta Das said today.

Das said that the banking regulator’s powers under sections 35AA and 35AB of the Banking Regulations Act, 1949, which enable them to direct banks on restructuring stressed accounts and approaching the National Company Law Tribunal for insolvency proceedings, aren’t under doubt because of the apex court’s judgment. The court had only pointed out that these powers must be exercised in a specific manner as stated in law, he said.

“The validity of section 35AA stands and henceforth we have to comply with the directions of the Supreme Court in this regard and act accordingly. In light of the Honorable Supreme Court’s order, Reserve Bank of India will take necessary steps including issuance of a revised circular as maybe necessary for expeditious and effective resolution of stressed assets,” Das said. “The RBI stands committed to maintain and enhance the momentum of resolution of stressed assets and adherence to credit discipline.”

While sections 35AA and 35AB allow the RBI to issue specific directions to banks, it must only be in the form of directions on specific defaults by specific borrowers. For this, the regulator must also seek prior permission of the central government before the powers are exercised. The section was introduced by the government in the form of an ordinance in May 2017 and was later legislated.

Following this, the regulator had created a list of 12 large corporate accounts where banks were asked to invoke the Insolvency and Bankruptcy Code to resolve them. In August 2017, the regulator had released a second list of 27 accounts where banks were asked to restructure loans before December 2017, failing which the accounts must be taken for insolvency proceedings.

In February last year, the regulator released a set of guidelines, where previous restructuring norms were withdrawn and banks were given freedom to devise their own restructuring schemes to resolve the stress on their books. Banks were also asked to swing into action on the day of a loan default by their borrowers, rather than wait for 90 days and wait for the account to be classified as a non-performing assets. However, banks only had 180 days to implement such a restructuring plan, failing which the account would face insolvency.

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While the Supreme Court didn't question the powers under sections 35AA and 35AB, the court noted that the February circular had been issued without prior permission from the government and was a blanket decision, rather than a direction on specific accounts. It ruled that the circular was ultra vires and therefore struck it down. The court had also said that all actions taken under the circular, including insolvency action, would have to be reversed.

The Supreme Court was responding to petitions filed by representatives of the power, shipping and fertiliser companies which would have been impacted by the circular.

Bankers are currently in the midst of considerable confusion, as all previous restructuring schemes such as the strategic debt restructuring and scheme for sustainable structuring of stressed assets were withdrawn as well. It's still not clear how they're expected to restructure and account and whether the resolution schemes implemented so far would stand.

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70 corporate accounts with loans worth Rs 3.8 lakh crore would have been impacted by the Feb. 12 circular, according to estimates by ICRA Ltd. It's not clear what portion of these loans have already seen restructuring schemes implemented or insolvency proceedings initiated so far.