Has SC thrown a wrench in RBI's circular on resolution of bad loans?

The Supreme Court has effectively stayed the implementation of RBI’s February 12 circular till its next hearing in the matter on November 14, providing relief to borrowers from power, sugar and textile sectors who were staring at the prospect of being dragged to India’s bankruptcy courts.

The relief came on Tuesday, the last day of the 15-day window given by the RBI to lenders for appointing legal counsel to file insolvency cases. The central bank’s circular in February directed lenders to file insolvency proceedings against all corporate borrowers above Rs 2,000 crore if a resolution plan could not be worked out in 180 days.

While hearing the central bank’s petition, which sought a transfer of all of the petitions against its circular to the Supreme Court, the apex court also ordered transfer of cases filed in various high courts against the circular to itself.

These cases have been filed by Independent Power Producers Association of India, Association of Power Producers, Shipyards Association of India, Dharani Sugars and Chemicals Ltd and the South Indian Sugar Mills Association.

“Status quo, as of today, shall be maintained,” ordered the bench of Justices Rohinton Fali Nariman and Indu Malhotra. This, most stakeholders agree, is a setback to the RBI’s plan to push lenders on expediting recovery of bad loans and cleaning up their balance sheets.

However, a few others, such as corporate lawyer Shardul Shroff of Shardul Amarchand Mangaldas believes that the status quo order only applies to the transfer petition and pending writ petitions.

“It is erroneous to conclude that the banks will not be able to approach the National Company Law Tribunal until further orders of the apex court,” Shroff told Bloomberg.

Earlier, the Allahabad high court had declined to halt implementation of the RBI circular on a petition filed by private power companies, giving a big thumbs-up to the regulator’s effort to clean the banking system of bad loans.

Meanwhile, lenders are trying to find buyers for stressed power assets outside the Insolvency and Bankruptcy Code (IBC) process.

Power Finance Corporation (PFC), which is part of several consortia with exposure to stressed power projects, expects to recover a major chunk of its loans without resorting to insolvency proceedings.

“Our loan exposure to stressed power projects is Rs 25,000 crore, out of which we expect to recover at least Rs 16,000 crore outside the IBC Process,” a senior PFC official, who declined to be identified, told The Wire.

Bids for auction of stressed assets can be invited outside the IBC process as well. Cases that land up in National Company Law Tribunal can also be withdrawn if the 90% members of the committee of creditors vote for it.

The RBI had provided a grace period of 180 days for implementing a resolution plan that ended on August 27. After that, lenders had an additional 15-day window to appoint counsel.

As many as 60 corporate loan defaulters and 34 power companies – including GMR Chhattisgarh, Ind-Barath Energy (Utkal), Lanco Anpara and Jindal India Thermal Power – and non-power sector players such as Bombay Rayon, Gitanjali Gems, Gayatri Projects, Patel Engineering, Gammon India, GTL Infrastructure, Punj Lloyd, Reliance Defence & Engineering, Bajaj Hindusthan, Pratibha Industries and McNally Bharat Engineering Co are lenders’ hit list.

These companies together owe about Rs 3 lakh crore to banks and financial institutions. Of this, Rs 1.75 lakh crore is owed by stressed power projects.

The RBI circular has laid down strict timelines for banks to initiate insolvency proceedings. Under the new framework, even a single day’s delay in payment triggers default.

The loan account becomes non-performing asset (NPA) if payment gets delayed by 90 days. Following that, lenders have 180 days’ time to implement a resolution plan. Failing that, they must initiate insolvency proceedings for the recovery of loans.

The Allahabad high court declined to stay RBI circular but it, nevertheless, asked the centre to explore the possibility of finding ways to prevent stressed power assets from being taken to the bankruptcy court.

Cabinet secretary PK Sinha recently held the first meeting of the high-powered committe for consultations with stakeholders in this regard. However, sources said the no RBI representative turned up for the meeting.

The committee includes representatives from the ministries of railways, finance, power, coal and banks with major exposure to the electricity sector.

The Allahabad high court has also asked the government to examine the possibility of advising the central bank under Section 7 of the RBI Act against initiation of bankruptcy proceedings. Section 7 gives the centre a range of powers to give directions to the central bank in public interest. In this case, this rare provision could be used to force the central bank to dilute its stricter NPA norms for the power sector.

The Centre, which has struggled to adequately recapitalise India’s banking system, has argued that the power industry needs special treatment due to the large number of stressed projects and low investor interest. The RBI, however, has stuck to its guns.

While admitting Independent Power Producers Association of India’s (IPPAI) petition challenging the RBI’s February 12 circular earlier, the Allahabad high court had directed banks and financial institutions not to initiate insolvency proceedings against non-willful loan defaulters until the finance ministry holds a meeting of all stakeholders in this regard.

The court had requested finance secretary Hasmukh Adhia to explore the possibility of preventing stressed power plants from becoming NPAs in the wake of the central bank’s new framework for identification and resolution of bad loans.

At the time, it had based its initial order on the findings of a report by the parliament’s standing committee on energy that warned that as much as Rs 1.75 lakh crore of stressed private investment in power generation is at the risk of becoming dud assets.

Power companies and lenders, however, were hoping for an extension given the large number of factors that have placed stress on the power sector.