Further still, the circular gave them not more than 180 days to approach a bankruptcy tribunal for the resolution of said loan if the exposure was more than ₹20 billion.
"So in a way, it will be the government which will direct the banks on the NPA resolution mechanism and this could be the way forward", the source said. The government had earlier asked the RBI to make sector-specific relaxations in the timeline for the implementation of the circular.
"Directions which can be issued to banks can only be in respect of specific defaults by specific debtors". Some had even challenged the validity of the RBI's directive saying its "one-size-fits-all" did not account for external factors.
What the Supreme Court basically said is that the powers of the RBI under Section 35AA have to be exercised in a particular manner and henceforth we have to comply with the directions of the Supreme Court in this regard and act accordingly.
A Parliamentary Standing Committee on Energy report tabled past year 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. Similar petitions were moved at the Madras High Court and the Delhi High Court. The RBI argued that the circular had been issued in the public interest, with a view to ensure the timely resolution of stressed assets.More news: Chicago Officials Plan to Sue Jussie Smollett for Refusing to Pay $130,000
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The order provides immediate relief to companies that have defaulted in repayments, especially those in the power, shipping and sugar sectors.
CNBC TV said that the judgment is "bank credit negative", meaning that if defaulters are forgiven for bad debt, banks are the ones at a loss without punitive powers. "All these options are within the commercial domain of banks.they will still remain answerable to the RBI", Lakshmikumaran & Sridharan Executive Partner Punit Dutt Tyagi said. This circular imposed very stringent conditions on lenders in relation to large loan accounts.
In February 2018, the RBI put out a circular on classification of non-performing assets that required banks to refer any account with a loan of more than Rs 2,000 crore to bankruptcy court if it is not resolved within 180 days of a default. However, the resolution process, which was expected to be expedited, may get delayed, Gupta said.
"Incremental NPA formation is estimated to have halved to 3.7 per cent (of opening net advances) for the full year ended March 31, 2019, compared with 7.4 per cent in fiscal 2018", Financial Sector Ratings Director Rama Patel said.