Apr 3, 2019

RBI 12 February circular no more: What it means for banks, IBC cases

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The Supreme Court setting aside the Reserve Bank of India’s (RBI’s) 12 February 2018 circular to replace all loan restructuring schemes with a formal bankruptcy process has restored previous debt recast options for defaulting companies and given a free hand to banks to explore steps to rescue such companies outside the court. The apex court’s decision on Tuesday to strike down the RBI circular will significantly impact lenders and defaulting firms.

For lenders, who were asked by RBI to put in place an early recognition system for bad loans, the decision opens up the possibility of less provisioning requirements as they could drop the tag of non-performing asset (NPA) in the case of some borrowers.

The ruling also invalidates all the decisions taken by banks and investors under the Insolvency and Bankruptcy Code (IBC) in putting together new corporate turnaround schemes which are at various stages, explained Manoj Kumar, partner at law firm Corporate Professionals.

Anil Gupta, vice-president and sector head (financial sector ratings) at Icra Ltd, said the total debt estimated to have been impacted due to the RBI circular was ₹3.8 trillion across 70 large borrowers, of which ₹2 trillion was from 34 borrowers in the power sector. These companies will now get the earlier options for restructuring.

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