RBI CIRCULAR - SQUASHED AND FLATTENED

Supreme Court (SC) squashing the “Feb 12^th circular” was a shocker! We are now back to square one, forced to go back to the old system which hollowed out the entire banking system.

The Feb 12th circular from the RBI was like a sweeping but very stringent way of dealing with India’s mounting NPAs. People called it “headmastery” but that is what was needed!

First a quick look at what the circular was all about:

• Loans of Rs.2000 crore and above, if defaulted on payment for even a single day, banks to immediately initiate a resolution plan.
• Banks were given 180 days, beginning from the first day of default to finalise and implement a resolution.
• If the resolution plan is not implemented within 180 days, the account must be referred to the Insolvency and Bankruptcy Code (IBC) within 15 days.
• All the various debt restructuring schemes were done away with - Strategic Debt Restructuring (SDR), the Scheme for Sustainable Structuring of Stressed Assets (S4A), and the Corporate Debt Restructuring (CDR) scheme – all were gone.
• Banks were asked to identify stressed accounts immediately – not wait till it’s beyond reprieve.
• Banks to classify these accounts under ‘special mention accounts’ and report this to RBI’s large credit database.
• Banks to report defaults on a weekly basis in the case of borrowers with more than Rs 5 crore in bank debt. 
• The Joint Lenders Forum was disbanded.
• For large accounts where a resolution plan is being implemented, the account should not be in default at any point during the specified period.
• If there is a default within the specified period, the lenders should file an insolvency application.
• An account that has been restructured shall immediately be downgraded to being NPA.

Well, all this stands nullified today. The SC said that it found RBI’s Feb 12^th circular to be “ultra vires.” This means the SC felt that RBI was acting beyond its legal power or authority.

This circular was squashed after some 50 petitions were filed by companies and associations from the shipping, power, sugar and fertilizer industries. Their contention was that the RBI circular was unconstitutional as it had clubbed all industries together, without realizing sector specific issues. The power sector especially was mighty miffed as it felt that its loans had become NPAs mainly on account of external factors – lack of power purchase agreements, delay in payments, lack of sufficient coal/fuel and so on. The petitioners were unequivocal is saying that RBI cannot have a rule which is one-size-fits-all.

And the two other bones of contention were the one-day defaulter rule and the abolition of the traditional restructuring process. They felt that by making the initiation of insolvency proceedings mandatory after 180 day deadline, the circular takes away the discretion of financial creditors which is given to them under the IBC.

Yes, agreed that RBI should not have adopted this holistic approach; indeed one-size does not fit all. Only those sectors, which have external factors going beyond their control could have been given a different set of rules. The way an FMCG and a power company runs are completely different.

But for the SC to completely squash this ruling puts the entire banking system in a sense of chaos. This means all cases which are now with the IBC will now get reversed. Everything, all the insolvency proceedings initiated under Sec7 of IBC also stands squashed. Maybe the SC could have directed the RBI to revise some of the irking provisions but doing away with it completely will aid the defaulters only.

The most ominous ruling of all – reference under IBC to be on case-specific basis but with authorisation of the central Govt. Does the IBC have any claws and teeth now? And why should the Govt interfere in this?

This means we are clearly going back to the same old ways, where banks will sit on piling NPAs and we will continue with our credit culture of deliberate delays, with no respect for paying up on time.

The RBI wanted to go to an atmosphere where the system itself penalized the defaulting companies through rating downgrades, which in turn hiked borrowing costs and more importantly, warned everyone that it was on the brink, thus controlling further spiraling of NPAs.

Back to an era of baboons where companies as well as banks will get back fast to “scratching each other’s back” and conceal the true state of affairs, until it all once again comes crashing down.