However, it is not going to be an overnight process as was done under the February 12, 2018 RBI circular, the sources said, adding that the interim government may issue directions to the banks over sector specific NPA resolutions so that there is no lag in the NPA checking mechanism. Therefore, in an effort to warn banks and borrowers that they will be penalised for defaulting on loans, the RBI issued a controversial circular.
"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.
An Apex Court bench, headed by Justice Arun Mishra, declared the RBI circular as "unconstitutional" and "ultra vires".
However, the SC had upheld the constitutional validity of Section 35AA of the Banking Regulation Act, which empowers the Centre to act, either directly or by directing RBI to take action against defaulters. The relief also extends to ₹840 billion worth of loans to companies in other sectors such as sugar, shipping and infrastructure. The RBI may now have to come up with a new circular, he said.
Tuesday's ruling also raises questions around the validity of a debt resolution plan at beleaguered carrier Jet Airways as bankers said that a part of the resolution process was based on processes laid out in the RBI's february 12 circular that the court has now quashed in its entirety.
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Now, the RBI can ask for a review from the SC on whether its circular can still work without the specific clauses that the court disagreed with. Since banks have already provisioned for likely loan losses, that process was unlikely to be reversed, a top banker with a public sector bank said.
"Voiding of the February 12 circular is credit negative for Indian banks". According to the circular, lenders had to classify a loan account as stressed if there was even a day of default.
In case of defaults of Rs 2,000 crore or more, a resolution plan would have to be implemented within 180 days, and if the resolution plan was not implemented, then the banks would have to file for insolvency proceedings against the defaulters.
"The resolution of stressed loans impacted by the circular will be further delayed as the process may have to be started afresh", Srikanth Vadlamani, vice-president, Financial Institutions Group, Moody's Investors Service, said.
The controversial circular issued by former RBI Governor Urjit Patel, which targeted companies-mostly in power, sugar and fertilizer sectors-with loans of Rs 2,000 crore or more, had stunned the industry.