Supreme Court Quashes Tough RBI Circular On Resolving Bad Debt

The Supreme Court on Tuesday quashed a Reserve Bank of India circular on resolving bad debt, providing relief for some major corporate defaulters but throwing India's nascent bankruptcy regime into question.

The Supreme Court said the RBI's circular from February 12 last year on how banks should handle defaulters was unconstitutional and "ultra vires", essentially meaning that the central bank has acted beyond its powers.

A spokesman for the RBI declined to comment, saying it had yet to go see the order.

The circular directed banks unable to agree upon a resolution plan with any defaulter within 180 days to drag the defaulter into a time bound insolvency process.

Several companies had challenged the circular in court arguing the time given by the central bank was insufficient to tackle bad debt. 

The ruling gives relief to several companies, especially power companies, who have defaulted on loans due to fuel shortages, or issues tied to power purchase agreements with state governments. 

A senior banker and a state-run bank said the ruling would be a positive for banks and companies.

But some bankers fear the ruling may result in increased wrangling between banks and borrowers around soured loans and dent bankruptcy reforms.   

"This will once again mean we are back to the old days when banks and companies used to delay debt resolution, with each one trying to buy time," said one banker handling non-performing accounts at a state-run bank.

(Reuters)