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SC squashing RBI circular negative for banks, to delay resolution

by The Editor
April 3, 2019
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SC squashing RBI circular negative for banks, to delay resolution
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Mumbai: Ratings agencies and industry analysts have said the Supreme Court striking down the February 12 RBI circular on loan defaults as credit negative for banks as the debt resolution process may have to be started afresh.

Earlier in the day the Supreme Court quashed the RBI circular of February 12, 2018 dealing with loan defaults by making it mandatory on banks to recognize even a day's default and resolve the problem in 180 days failing which such accounts must be referred to NLCTs for resolution for large account of Rs 2,000 crore and above.

The order, handed out by a bench headed by justice RF Nariman said, "we declare the RBI circular ultra vires." The details of the order are awaited.

International rating agency Moody's in a note Tuesday said voiding of the circular is credit negative for 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," it said.

Moody's also said the resolution of stressed loans impacted by the circular will be further delayed as the process may have to be started afresh.

The bankers had asked some relaxation in the one-day default norms of the February 12 circular but without any success. This 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 last year.

Domestic rating agency Icra in a note said the circular removed 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 affected borrowers under Bankruptcy Code for resolution.

"Despite quashing of the circular, banks will continue to have an option to refer such defaulting borrower under IBC, in case the resolution plans fail," Icra said.

The agency had estimated total debt impacted due to the February 12 circular to be around Rs 3.8 lakh crore across 70 large borrowers of which Rs 2 lakh crore across 34 borrowers were in tRead More – Source

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ET Markets

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The Editor

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