The Supreme Court’s ruling, quashing the Reserve Bank of India’s circular on recovery of bad loans, has put a question mark over cases that are at different stages of debt resolution. Though the apex court has upheld the Insolvency and Bankruptcy Code (IBC) in its entirety, there is confusion over who should have the power to initiate the bankruptcy proceedings. The court has shifted the authority from the RBI to the creditor bank. The way forward is for RBI to issue a fresh circular, with government support, to ensure that recent improvements in the credit culture of both borrowers and lenders are not reversed. By setting aside the February 2018 circular that mandated banks to draw up a resolution plan within 180 days of default or file for insolvency under IBC, the court may have unwittingly turned the clock back on resolution of stressed assets. The apex court has ruled that when resolution through the IBC is to be effected, the RBI requires authorisation of the central government. However, this technical ground should not lead to a perception that the authority of the RBI as an independent regulator is being eroded. The experience shows that the banks have often dragged their feet in tackling bad loans and there has been a long-felt need for the regulator to crack the whip. There are fears that the process of resolution of bad loans to the tune of Rs 3.80 lakh crore across 70 large borrowers could now slow down. Since banks will have the choice of devising resolution plans or going to the National Company Law Tribunal under the IBC, the urgency that the RBI’s circular had introduced in the system could be impacted.
The NPAs, a consequence of reckless lending by banks, has been a huge legacy problem in India. It erodes faith in the regulatory mechanism and drags down the economy. With bad loans amounting to nearly Rs 10 lakh crore, India has earned the dubious distinction of ranking fifth in the world among the nations with high NPAs. The problem with public sector banks is that they have a disproportionately higher share of bad loans from among large borrowers, who accounted for almost 55% of loans advanced by all banks as of September last year. By RBI’s own admission, the NPAs, at the gross level, soared to 11.6% of all advances as on March 31 last year. The failure of the schemes such as corporate debt restructuring, stressed asset resolution and the Scheme for Sustainable Structuring of Stressed Assets had prompted the central bank to issue the circular. The good work done by the RBI in debt resolution in the last one year should not be allowed to go in vain.