[Manvi Khanna is a third-year student at National Law University, Odisha.]
The recent report published by the Standing Committee on Finance on the banking sector in India observed that the capacity of banks to lend has been affected disastrously due to mounting non-performing assets (NPAs), posing a big challenge to the economic growth in India. NPAs are the advances in respect of which the borrower has stopped making interest and/or principal repayments for over a period of 90 days. The cash flow in the economy comes to stagnation due to dismal recycling of funds in the system, and the failure to recover loans has long term impacts on availability of credit for future businesses, industrialists and entrepreneurs. As per the latest estimates, the total value of gross NPAs in the economy stands at Rs. 10.35 lakh crores out of which the NPAs of State Bank of India alone are worth Rs. 2.23 lakh crores. Various steps have been taken by the Reserve Bank of India (RBI) in the past to tackle this situation of rising NPAs in the banking sector in the form of sale to asset reconstruction companies, corporate debt restructuring, strategic debt restructuring, refinancing of stressed assets etc.. Similar initiatives have been taken by the government in the form of legal, financial and policy level reforms with low to moderate success levels.
In consonance with the Insolvency and Bankruptcy Code 2016, the RBI through its notification in February 2018 ‘Resolution of Stressed Assets - Revised Framework’ (RBI Circular) had substituted all pre-existing guidelines with a generic, simplified, more time-bound framework for resolution of the stressed assets. The RBI Circular required the bankers to come up with a resolution plan immediately after the first day of default. If there was no resolution plan or even if there was one and banks failed to implement it within 180 days, the case would have mandatorily gone to the National Company Law Tribunal (NCLT). It also introduced a provision of keeping in tab one-day defaulters to identify the incipient stress and flag immediately when repayments are overdue by a day. Various appeals had been filed in different High Courts against the RBI Circular. A two-judge bench of the Allahabad High Court had ruled in favour of the RBI’s powers to issue guidelines and refused to grant interim relief to producers from being taken to NCLT for insolvency proceedings.
All actions against the RBI Circular had been transferred to the Supreme Court in Dharani Sugars and Chemicals Ltd. v. Union of India and others and the challenge before the Supreme Court pertained to the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949 and of the RBI Circular. The RBI tried to protect the said circular by citing reasons of public interest, interest of banking policy, interest of depositors and interest of national economy to protect against evergreening of debts. It stressed on the expansive interpretation to be given to the Reserve Bank of India Act, 1934 and the Insolvency and Bankruptcy Code, 2016. It relied on Sections 21, 35A, 35AA and 35AB of the Banking Regulation Act, 1949 as the source of power for issuance of the RBI Circular The Central Government defended Sections 35AA and 35AB as regulatory provisions that cannot be called arbitrary in any manner. However, it was against the ‘one size fits all’ approach of the RBI Circular. The Supreme Court in its detailed ruling has restored the flexibility of banks to restructure the stressed assets without undergoing the formal process of insolvency resolution under the Insolvency and Bankruptcy Code, 2016 and has also held Sections 35AA and 35AB to be constitutionally valid.
The Banking Regulation (Amendment) Ordinance, 2017 and the Banking Regulation (Amendment) Act, 2017 were held to be conferring regulatory powers upon RBI to carry out its functions under the Banking Regulation Act, 1949 without there being dearth of guidance as the same is available from the preamble, the statement of object and reasons and the provisions of the Banking Regulation Act, 1949 itself. However, with reference to the RBI Circular, there were many legal as well as implementation issues. In its application to the power sector, which is a player in restricted market, the RBI Circular was held to be against the recommendations of the 37th Parliamentary Standing Committee Report on Stressed / Non-performing Assets, which had stated that NPAs amounting to Rs. 34,044 crores were primarily on account of changes in government policy and failure to fulfil commitments by the government. To apply a 180-day limit as a straitjacket formula to all the sectors in complete disregard to the special problems faced by any specific sector was an impractical idea keeping in mind the fact that the government's failure to fulfil its promises was also one of the reasons for the rising woes of the power sector. Moreover, under the provisions of the RBI Circular, restructuring in exclusion of the Insolvency and Bankruptcy Code, 2016 could only occur if the resolution plan is agreed by all lenders, which would be quite difficult to implement as a lender with only 1% stake could also stall the resolution process.
The most glaring error was in the application of the newly introduced Sections 35AA and 35AB which grant two separate and distinct powers. Section 35AA is the source of power when it comes to issuance of directions to initiate an insolvency resolution process under the Insolvency and Bankruptcy Code, 2016. However, when it comes to issuance of directions other than resolution under the Insolvency and Bankruptcy Code, 2016, such power is dealt by Section 35A read with Section 35AB of the Banking Regulation Act, 1949. Section 35AA specifically enables the Central Government to authorise the RBI to issue directions in case of a “default”. Default as defined under the Insolvency and Bankruptcy Code, 2016 means non-payment of a debt when it has become due and payable by the corporate debtor. The two conditions precedent in this section for RBI to direct a bank to move under the Insolvency and Bankruptcy Code, 2016 are (a) authorization from the Central Government, and (b) occurrence of a specific default. Thus, a general circular which applies to all defaulters of loans above Rs. 2,000 crore without having reference to the circumstances of each case was blatantly ultra vires the said provision. The intention of the legislature can also be inferred from the Press Note dated May 5, 2017 which introduced the Banking Regulation (Amendment) Act, 2017 for resolution of “specific” stressed assets and allowed the RBI to intervene in “specific” cases of NPA resolution.
It would have been appropriate for the Central Government to use its powers under Section 7 of the Reserve Bank of India Act, 1934 and take a decision to resolve the conflict after the issuance of the impugned circular, but it chose to remain silent. While the RBI will soon come up with a revised framework for dealing with stressed assets, it would be interesting to see as to whether the judgement is a step in the right direction or not. For now, all cases based on the RBI Circular stand quashed. The strictness of the timelines in the RBI Circular and the fear of losing companies to insolvency proceedings before the NCLT had forced many companies to take meaningful actions to resolve their debts. There is a persistent fear after the judgement that the process of resolution which had picked up pace after a long period of time would slow down once again. On the other hand, banks still have the option to initiate insolvency proceedings on their own and choose the best suited tool for a specific borrower, with less time constraints and compulsions.