The Supreme Court (SC) on Tuesday repealed the RBI’s 12 February circular, which laid down rules for recognising one-day defaults by large corporates and initiating insolvency action as a remedy. On behalf of their customers, banks would take a call on referring cases to National Company Law Tribunal (NCLT), one case at a time.
On February 12, 2018 RBI issued a notification, when Urjit Patel was Governor. The RBI laid down a revised framework for the resolution of stressed assets, which replaced all the earlier instructions on the subject. The circular introduced a shorter, new, one-day default norm. It said that as soon as there is a default in the borrower entity’s account with any lender, all lenders — singly or jointly —must take steps to cure the default.
Banks were required to immediately start working on a resolution plan for accounts over Rs 2,000 crore, which was to be finalised within 180 days. In case of non-implementation, lenders were required to file an insolvency application.
The RBI said that with the view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), a resolution plan must be finalised in 180 days, with 90 days grace. It is important to substitute the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets.
Prior to the 12 February circular of the RBI, the resolution mechanism available to banks were Corporate Debt Restructuring Scheme (CDR), Scheme for Sustainable Structuring of Stressed Assets (S4A), and Joint Lenders’ Forum (JLF).
As per the circular, lenders had to classify a loan account as stressed if there was even a day of default. The bankers had to mandatorily refer all accounts with over Rs 2,000 crore loans to the NCLT or the bankruptcy court if they failed to resolve the problem within 180 days of default.
The RBI swapped the previous guidelines with a harmonised and simplified generic framework for resolution of stressed assets in view of the enactment of the IBC. The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which looks to consolidate the existing framework by establishing a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016.
