In December 2016, Modi – government enacted the Insolvency and Bankruptcy Code [IBC] – a robust and impeccable legal framework for recovery of non-performing assets [NPAs] of lenders in a fast track mode. It also amended the Banking Regulation Act [BRA] [2017] arming the Reserve Bank of India [RBI] with powers to give directions to banks for making reference to National Company Law Tribunal [NCLT] for resolution of NPAs under IBC.
Following this, the RBI had sent two lists involving 40 accounts with NPAs worth over Rs 400,000 crore to banks [June & December, 2017] for taking up resolution and in case not resolved [within deadline] make reference to NCLT.
Meanwhile, on February 12, 2018, the RBI issued an order requiring that in respect of accounts with aggregate exposure of the lenders at Rs 2,000 crore and above [as on March 1, 2018], as soon as there is a default in the borrower’s account with any lender, all lenders – singly or jointly – shall initiate steps to cure the default. This may involve any actions including, but not limited to payment of all over dues by the borrower entity, sale of the exposures to other entities/investors, change in ownership, or restructuring.
For this, the lenders get 6 months from the day an account becomes NPA. On its expiration, the case is referred to NCLT who gets 6 months to complete the resolution process, extendable by 3 months under extraordinary circumstances. These deadlines are very strict even as the apex bank refuses to condone even a days’ delay.
Under the circular, thus far, over 70 accounts involving NPAs worth about Rs 380,000 crore have been either referred or on the verge of being referred to the NCLT. The promoters of companies especially those in the power sector [these account for about Rs 200,000 crore NPAs] challenged the order. On April 2, 2019, the Supreme Court [SC] has held the RBI circular to be ultra vires of the constitution.
It opined that the RBI does not have legal authority to issue a generalized/sweeping order to the banks though it has upheld the legal validity of section 35AA of the amended BRA [2017] under which it can give directions on specific cases under authorization from the union government. The order puts in a limbo the fate of all those cases taken up for resolution under the February 12, 2018 circular even as cases under IBC prior to this are unaffected.
It brings to naught all the efforts that have gone in to advancing resolution of accounts under IBC. With collapse of the very foundation [read: Feb 12, 2018 circular] on which the superstructure of processes is built, things are back to the drawing board implying that the lenders/banks will have to make a start de novo.
Though, RBI can still issue case-specific orders, the time already lost can’t be recouped. Moreover, it can’t be expected to micro-manage individual accounts. The initiative lies with the banks who in the past, never showed seriousness in dealing with NPAs. Worse still, defaulting promoters would now lobby with them to get better deals including retention of company’s control.
Consequent to the circular, RBI had abolished all existing mechanisms for resolution of NPAs such as strategic debt restructuring [SDR], corporate debt restructuring [CDR], scheme for sustainable structuring of stressed assets [S4A] and the Joint Lenders’ Forum [JLF]. All accounts, including those where any of these schemes were invoked but not yet implemented, were also governed by the revised framework. Now, with the circular quashed, these fancy schemes with sophisticated nomenclature which were nothing but sweet-heart deals involving huge hair-cuts by banks may be revived.
In short, the decision of the apex court to write off RBI’s Feb 12, 2018 circular has rendered the resolution under IBC dysfunctional. When, the NPA account is not allowed to reach NCLT within a reasonable time frame, how can action begin? That IBC is a platform capable of delivering excellent results is amply demonstrated by recovery of over Rs 350,000 crore from the cases earlier referred to it. Regrettably, the SC order has put a speed breaker.
An argument that the circular was draconian and that it deprived banks of recovering a good value from the NPA is untenable. Pertinently, even under the circular, banks were allowed 6 months [from the day an account becomes NPA] to find a resolution. Even after it comes under IBC, a fair attempt is made by the RP [resolution professional] to realize maximum value as a ‘going concern’. For this, 6 months is allowed extendable by 3 months.
So, a total of 15 months is available for ‘resolving’ the account from the day it is declared NPA. The liquidation is triggered only after this. If, the stakeholders can’t reach a satisfactory outcome even during the 15 month period, then, surely there is something amiss. In this backdrop, taking a lenient stance and leaving things to be done only by lenders would lead to business as usual.
True, some power projects have been affected due to factors such as not getting fuel linkage, inability to sign power purchase agreement [PPA], or delayed payments by state controlled distribution utilities etc. But, that can’t be a valid reason for diluting the process for recovery of loan. In genuine cases, the government can always extend necessary support. This can go hand-in-hand with resolution happening under IBC.
Ideally, issue of a diktat by RBI and detailed follow up by banks/lenders [as already done] was the way forward. But, now that the highest court has nullified it, the banking regulator has no other option but to micro-manage things i.e. issue directions in each and every case with stringent timelines.
The RBI should promptly act to overcome the hurdles created by the apex court keeping in mind the overarching interest of protecting the hard earned money of depositors.