‘Borrower behaviour will deteriorate’

The Supreme Court judgment striking down the Reserve Bank of India’s February 12 circular on insolvency proceedings for NPAs will lead to deterioration of borrower behaviour and increase delays and litigation, according to analysts and lawyers.

That said, the view is that there will be no impact on resolution cases that have already been completed or are under process, as they were done with the approval of the majority of the banks and not specifically because of the RBI’s circular. However, the resolution proceedings will be void in cases where it can be proved that the process was done based on the RBI circular.

The RBI’s February 12 circular mandated that banks had to move accounts of over ₹2,000 crore for resolution as soon as they defaulted, that is, when they fail to make payments for 90 days. The banks had to finalise this plan within 180 days, failing which the case would be referred for insolvency proceedings under the Insolvency and Bankruptcy Act.

RBI’s move in 2018 was resisted strongly, notably by the power sector, and was reportedly one of the major bones of contention between the Finance Ministry and the RBI last year.

“The Supreme Court decision is likely to result in a further slowdown in the already tardy pace of resolution of stressed assets in the power sector,” Sabyasachi Majumdar, senior vice-president & group head – Corporate Sector Ratings, ICRA, said.

“The core issue because of this is that we think borrower behaviour, which was seemingly improving over the last few quarters, could again see complacency and deterioration,” Jindal Haria, associate director at India Ratings and Research said. “Restructuring without the guidelines is a massive consensus building exercise among the banks. The process will also become more litigious,” he added. “There will be more litigations and counter-litigations among the parties to delay the process of resolution.”

The impact of the Supreme Court’s judgment, in most cases, will not be retrospective, and will largely affect cases going for resolution in the future. Here, analysts said, banks will retain their right to move a case for resolution if the consensus decision is to do so, but now it would be at their discretion.

‘Nil impact’

“There will be nil impact of the Supreme Court judgment on the insolvency proceedings that are underway or have been completed as all of these were done following a default and with the consensus of the banks involved,” Abizer Diwanji, Financial Services and Restructuring Leader at EY India, said. “It’s not as if these cases were moved stating that it was pursuant to the RBI’s February 12 circular.”

However, if insolvency proceedings were begun based on the RBI’s circular, then such proceedings will be deemed to be void following the Supreme Court’s judgment.

“The Supreme Court judgment can be given retrospective effect provided there is material on record to suggest that the IBC petition under Section 7 of the Code was filed only because of the operation of the circular dated February 12, 2018,” Punit Dutt Tyagi, executive partner at Lakshmikumaran & Sridharan, said.

“In such cases, as per the Supreme Court, the proceedings will be non est.”

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Printable version | Sep 16, 2021 3:08:22 PM |

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