Home / Business / SC nixes RBI circular on bad loans as ultra vires

SC nixes RBI circular on bad loans as ultra vires

New Delhi (IANS) : In a huge relief to the regulated sector, the Supreme Court on Tuesday struck down as ultra vires the controversial February 12, 2018, Reserve Bank of India (RBI) circular that mandates lenders to initiate resolution or restructuring of loans of Rs 2,000 crore and above within six months from the date of default.

After the expiry of the 180 days, the defaulting borrowers, under the now struck down circular, had to mandatorily face proceedings under Insolvency and Bankruptcy Code (IBC).

“We have declared RBI circular ultra vires,” said Justice Rohinton Fali Nariman pronouncing the judgement on a batch of petitions by the industries — power, fertiliser and sugar — challenging February 12, 2018 apex bank circular.

Justice Nariman was accompanied by Justice Vineet Saran on the bench.A

Striking down the February 12 circular, the court said the government authorisation to RBI to act under Section 35 AA of the Banking Regulation Act was for a specific default and not general and thus 35AA could not have been taken recourse to.

“It is clear that the RBI can only direct banking institutions to move under the Insolvency Code if two conditions are specified, (i) that there is a Central government authorisation to do so; and (ii) that it should be in respect of specific defaults. The Section, therefore, by necessary implication, prohibits this power from being exercised in any manner other than the one set out in Section 35AA”, said the judgement.

The court verdict would have a bearing on Rs 2.2 lakh crore of bad loans.

“Consequently, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered must fall along with the said circular”, Justice Nariman said.

As a result, the judgement further said, “All cases in which debtors have been proceeded against by financial creditors under Section 7 of the Insolvency Code, only because of the operation of the impugned circular will be proceedings which, being faulted at the very inception, are declared to be non-est.”

The RBI circular that was struck down today said that in the pre-Insolvency and Bankruptcy Code (IBC) stage, the moment a commercial entity is in default on a loan of Rs 2,000 crore or more even for a day, the bank would initiate steps for resolving, including restructuring the loan.

The RBI’s February 12 circular requires banks to finalise a resolution plan in case of a default on large accounts within 180 days, failing which insolvency proceedings will have to be invoked against the defaulter. It also introduced a one-day default rule on term loans, which mandates treating a borrower who misses repayments as a defaulter the very next day.

The RBI’s February 12 circular requires banks to finalise a resolution plan in case of a default on large accounts within 180 days, failing which insolvency proceedings will have to be invoked against the defaulter. It also introduced a one-day default rule on term loans, which mandates treating a borrower who misses repayments as a defaulter the very next day.

About Maeeshat. in

Leave a Reply

Your email address will not be published. Required fields are marked *

*

17 − 9 =

Scroll To Top