• The prospect of recovering ₹3.8 lakh crore of stressed loans of over 70 large borrowers has become uncertain after the Supreme Court (SC) quashed the controversial February 12, 2018 circular of the Reserve Bank of India (RBI) on resolution of stressed assets.
  • The circular, which was opposed by banks as well as industry players, directed lenders to classify a loan account as stressed and start resolution process within one day of default.
  • If banks start resolution of an asset, they have to set aside higher capital, known as provision in banking parlance.
  • Banks were also asked to refer all loan accounts of over ₹2,000 crore for bankruptcy proceedings if resolution is not achieved in 180 days.
  • Also, all the existing loan restructuring facilities like corporate debt restructuring were withdrawn and Insolvency and Bankruptcy Code (IBC) became the only option for resolution of stressed assets.
  • Bankers and other stakeholders said resolution of stressed assets could now be delayed.
  • The current SC ruling, quashing the February 12 [2018] RBI circular on NPAs may have its own merit.
  • However, with respect to an escalation of default cases, this ruling will raise significant questions around the timely reporting and resolution under IBC — the primary reason behind IBC’s enactment.
  • We believe that the development will be negative for lenders and may prolong the recovery phase for the banks.
  • It also adds to uncertainty on the existing accounts’ classification, provision requirements etc.
  • ICRA, said the total estimated debt impact due to the circular is of ₹3.8 lakh crore across 70 large borrowers, and 92% of this debt was classified as non-performing by banks as on March 31, 2018.
  • Banks have made provisions of over 25-40% on these accounts and hence, should not impact the reported asset quality of profitability numbers.
  • However, the resolution process, which was expected to be expedited, may get delayed.
  • Bankers said they still had the option to refer an account to NCLT without referring to the circular.
  • But what happens to the cases referred to NCLT that cited the circular is uncertain.
  • The way forward, according to bankers, is that, the RBI should file a review petition with the Supreme Court, and think of an alternative mechanism for solving the issue.