India's Supreme Court order against the RBI will be a huge relief for 75 borrowers with loans worth over ₹2.4 trillion
Supreme Courthas rejected an order from the RBIwhich gives banks a 180-day period for the resolution of bad loans. As a result, around 75 large borrowers will also be let off the hook.
- If the verdict had gone against them, then banks would have had to provision assets against ₹2.4 trillion worth of bad loans.
- 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 Supreme Court has rejected an order from the RBI which gives banks a 180-day period for the resolution of bad loans. As a result, around 75 large borrowers will also be let off the hook.
With the verdict, India’s banks won’t have to categorise around ₹1.8 trillion worth of loans to 34 coal-based thermal power plants as “non-performing”. The relief also extends to ₹840 billion worth of loans to companies in other sectors such as sugar, shipping and infrastructure.
If the verdict had gone against them, then banks would have had to provision assets against these loans.
The verdict comes more than a year after the RBI released a circular on February 12th, 2018 that mandated banks to recognise loans of at least ₹50 million as having gone bad even in the event of a one-day default.
Further still, the circular gave them not more than 180 days to approach a
The rationale behind the circular was to tighten the noose on cash-strapped companies and force banks to account for bad loans immediately. It did lead to a dramatic reduction in defaults, as loans were borrowers did not pay installments on time fell by 60% to ₹551 billion between June and September 2018.
However, the order ran into an obstacle as power firms, along with shipping companies and sugar and textile producers, contested the one-day default norm and 180-day resolution period.
The companies in the aforementioned sectors were eventually granted interim relief in September 2018 pending a full hearing. The interim relief was aimed at helping banks restructure and offload their loans to struggling companies.
Throughout the past year, the RBI had refused to dilute the circular, maintaining its necessity in cleaning up the banking sector.
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