Explained: Why Supreme Court order on RBI note matters

Explained: Why Supreme Court order on RBI note matters

Explained: Why Supreme Court order on RBI note matters

The revised framework removed discretion with banks on resolution of stressed accounts.

But more importantly, the Supreme Court's order undermines the RBI's position as an independent regulator. The decision caused panic for many companies, in particular those in the power sector.

As part of the resolution plan, the State Bank of India (SBI)-led lenders consortium has taken over 50.5 per cent stake in the airline, with a view to selling the shares to a potential buyer in the coming months.

The RBI's circular led 34 power producers to drag the regulator first to the Allahabad High Court, which asked RBI to offer some respite, but the RBI did not budge and challenged it in the Supreme Court previous year.

Power sector was the worst hit by the circular and so were companies in steel, textile, sugar and shipping sector.

The power firms alleged that the central bank's notification was based on a "one-size-fits-all" approach and it does not take to account factors such as the reasons for non-payment.

Aside from opening up a Pandora's box on banks' future actions on stressed assets and raising questions on the RBI's powers to issue directions to banks, the Supreme Court's ruling does little to address the fate of the 34 identified stressed power projects, with an outstanding debt of about ₹2 lakh crore.

Power companies had moved Allahabad High Court against the RBI circular, which had refused to grant them interim relief last August.

"Its our endeavor and we will ensure there is faster resolution of stressed assets because it is very critical for the stability of the banking sector and has an impact on the overall financial sector".

RBI governor Shaktikanta Das said the circular will be issued without any "undue delay", saying the central bank "stands committed to maintain the momentum of resolution of stressed assets and credit discipline". But with the voiding, this may now have to be watered down.

The stressed power companies, however, sought temporary relief from the circular only for themselves. Bankers argued on Tuesday that the quashing of the RBI circular was unlikely to impact ongoing cases at NCLT.

However, another rating agency, Crisil Ratings, said banks' asset quality will not be materially impacted as bulk of the stressed loans have already been recognised and the judgment gives banks more flexibility and time to resolve stressed assets on their own.

"This apart, the resolution process is in any case subjected to regulatory risks as exemplified in the case of the Prayagraj Power asset, where the regulator has given a recent directive for a discount in PPA tariff while allowing the shareholding change approval for the same", he said. However, the resolution process, which was expected to be expedited, may get delayed, Gupta said. As of March 31, 2018, 92% of this debt had been classified as non-performing, and banks have made provisions of over 25-40% on these accounts, ICRA said.

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