SC holds ultra vires RBI’s February 12 circular mandating insolvency proceedings

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  1. The Supreme Court has struck down the Reserve Bank of India’s February 12 circular that dealt with resolution of stressed assets in the economy.The Supreme Court has held the February 12 circular ultra vires as a whole which means the RBI had gone beyond its powers in issuing the circular.Earlier,the apex Court had stayed the circular for power,sugar and shipping companies until ruling in the matter.
  2. On 12th February 2018,RBI had put out a circular on classification of non-performing assets that required (a)Banks to stipulate a one-day default rule on term loans.A borrower missing repayment even for a day will be treated as a defaulter and (b)Banks were required to immediately start working on a resolution plan for accounts over Rs 2,000 crore, which was to be finalised within 180 days.In case of non-implementation, banks were required to file an insolvency application.
  3. The circular went into effect on the same day that it was issued and all existing schemes for stressed asset resolution were withdrawn with immediate effect.These included the (a)Framework for Revitalising Distressed Assets (b)Corporate Debt Restructuring Scheme (c)Flexible Structuring of Existing Long Term Project Loans (d)Strategic Debt Restructuring Scheme (SDR) (e)Change in Ownership outside SDR and (f)Scheme for Sustainable Structuring of Stressed Assets (S4A).All these schemes had allowed more lenient terms of resolution than the February 12 circular.
  4. The circular objective was to stop the evergreening of bad loans.It is the practice of banks providing fresh loans to enable timely repayment by borrowers on existing loans.
  5. Several sectors such as power,sugar and fertiliser especially the unregulated sectors challenged the RBI circular in the Court as ultra vires on the grounds that it wrongly classified them as wilful defaulters. They argued that they were stressed because of extraneous reasons beyond their control and cannot be treated as wilful defaulters.Further, they also contended that the circular reduced the 270 resolution window further to 180 days.
  6. Non-Performing Assets(NPA) are loans or advances that are in default or are in arrears on scheduled payments of principal or interest,usually for a period of 90 days.Before the period of 90 days,they are called Stressed Assets.