Defending its controversial circular of February 12, the RBI informed the Supreme Court on Thursday that none of the petitioners (failing companies) of various sectors such as energy, shipping and sugar could present resolution plan that can be considered by the banks. . "It's obvious that they have no resolution plan," the RBI said, citing companies' room for maneuver under the September 2018 court order that lenders not act before other orders.
The circular stipulates a default rule of one day for term loans – the borrower failing to repay even a day will be treated as a defaulting party. Banks must complete a default resolution plan of more than 2,000 crore in the next 180 days, otherwise the insolvency process will begin.
"It should be noted that the additional period of 180 days also ended on 28.02.2019. Except for 2 or 3 resolved cases and a few others that have been referred to the NCLT, the situation remains the same, "said RBI.
The RBI stated that it wanted to tackle the "serious illness of the durability of crisis accounts that lenders use to avoid provisioning", as well as "preserve the economic value of assets and allow banks extend their portfolio to various companies under duress ".
According to the central bank, the stressed assets and NPAs of the banking system having reached "unacceptable levels", it was incumbent upon it to take urgent measures to resolve them quickly in order to improve the financial health of banks. The banks' gross NPA ratio, which was 2.35% in March 2011, rose to 11.46% in March 2018, the RBI told a bank chaired by Judge RF Nariman. The court reserved his orders.
Explaining the reasons for the February 12 circular, the RBI argued that instead of prescribing specific regimes under its existing guidelines, banks should be given the opportunity to restructure their viable but stressful accounts. Leading lawyers Rakesh Dwivedi and Liz Mathews, who represented RBI, argued that the circular was in the interests of banking policy, depositors and the public as well as in the interest of the national economy.
Although banks have invoked the strategic restructuring of debt in more than 140 cases, they have not been able to change ownership, even in a few cases, the RBI noted. As part of the restructuring of corporate debt, out of a total of 591 approved files, only 110 were completed until September 2017. Under the framework of the sustainable structuring of assets under constraint (S4A), only 22 Restructuring cases could be implemented from June 2016 to February 2018. As 20 out of 22 borrowers are in default even on restructured debt, the central bank added.
The February 12 circular was reprimanded for providing "a pill for all ills", a rigid calendar of 180 days; terminate all previous instructions; requiring a 100% agreement for a PR; in order not to leave room for problems faced by individual borrowers for external reasons; and not to distinguish between voluntary failures and genuine failures who suffer from serious regulatory problems.
However, the banking regulator stated that its revised framework had removed restrictive conditions such as personal guarantee, the right of set-off, debt sustainability at 50% and allowed banks to adapt the restructuring program in function of the borrower's cash forecast.
Responding to the energy sector grievance, who claimed that RBI had not taken into account the greater stress in this sector in its February 12 circular, the regulator said that they have been aware from the outset that the market in the regulated sector and the unregulated sectors operate to some degree differently. "Even if it is assumed that the RBI can only give instructions in" specific cases ", the circular can not be considered a fault, the RBI said.
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The September 2018 decision by the SC should give bankers time to finalize problem solving plans for stressed energy projects, with a combined capacity of about 13 gigawatts. However, it turned out that the Prayagraj Bara plant and the SKS Binjkote plants (1,200 MW) are the only two units that are constrained to find a resolution outside the NCLT within this time frame.