Supreme Court order on NPAs a relief for power companies

India's Supreme Court order against the RBI will be a huge relief for 75 borrowers with loans worth over ₹2.4 trillion

"The order of the Supreme Court mandates RBI to exercise its powers under Section 35AA "in respect of specific defaults by specific debtors".

The Supreme Court on April 2 strikes down the Reserve Bank of India's circular on resolution of stressed assets.

The notice came on the heels of banks finalising resolution plans for the "Dirty Dozen", a list of 12 Indian companies that went bankrupt and qualified for immediate resolution. Some had even challenged the validity of the RBI's directive saying its "one-size-fits-all" did not account for external factors.

It also provides a breather for companies in the sugar, shipping, infrastructure and textile sectors which were under pressure, said several bankers and lawyers. The government had earlier asked the RBI to make sector-specific relaxations in the timeline for the implementation of the circular.

RBI's February 12, 2018, circular had said that the banks would have to seek resolution under the Insolvency and Bankruptcy Code (IBC) if a borrower fails to pay the due amount within a period of 180 days of first default. "So, we will do all that is possible to ensure that the pace is maintained", he said. The decision caused panic for many companies, in particular those in the power sector.

A Parliamentary Standing Committee on Energy report tabled a year ago had said some 40,000 megawatts of stressed power capacity across 34 projects were at risk simply because of external factors such as fuel shortage, sub-optimal loading of coal, absence of fuel supply agreements with state-run monopolies and lack of power purchase agreements signed by states who were the sole buyers of electricity in most cases. The National Company Law Tribunal (NCLT) would also be involved in insolvency proceedings against the defaulting companies within 15 days of the six-month deadline.

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"Voiding of the February 12 circular is credit negative for Indian banks", said Srikanth Vadlamani, vice president, Financial Institutions Group, Moody's Investors Service.

The rationale behind the RBI's February 12th circular was to tighten the noose on cash-strapped companies and force banks to account for bad loans immediately.

The agency had also said 92 percent of this debt were classified as NPAs by banks as of March 2018 and also made provisions of over 25-40 percent on these accounts.

RBI keeps a capital buffer of over Rs 9.4 lakh crore now, which a section in the government feels is too high and thus should be parted with for better productive deployment like funding the cash-starved state-run banks or cash-crunched power distribution companies.

"However, Crisil said: "... a return to the pre-IBC era is not expected".

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