Bad debt norms: RBI to seek Election Commission nod.

Highlights

• It is now coming to the view that an explicit approval from the Election Commission is required as it is a new policy decision

• The EC code of conduct specifically exempted the conduct of monetary policy, which is considered crucial for the economy

After much deliberation, the RBI is expected to approach the Election Commission to put in place a new circular on bad debt resolution, paving the way for smooth implementation of the Insolvency & Bankruptcy Code and loan restructuring by banks.

The move is crucial after the Supreme Court set aside the controversial February 12 circular issued by then governor Urjit Patel. The RBI was initially planning to issue the revised circular that is expected to give more flexibility in restructuring stressed loans as against the rigid timelines for initiating bankruptcy under the older directive.

It is now coming to the view that an explicit approval from the Election Commission is required as it is a new policy decision.

The EC code of conduct specifically exempted the conduct of monetary policy, which is considered crucial for the economy. The circular issued in February 2018 had caused consternation among banks and corporates for three reasons. First, it did away with all the debt restructuring scheme. Second, it forced lenders to arrive at a resolution acceptable to 100% of creditors within 180 days of a default failing which they had to initiate bankruptcy proceedings.

It made the process of resolution tougher as the plan had to certified by a rating agency and required a fifth of the principal to be repaid within a year. If the promoter was not in a position to repay within a year, the lenders would have to take the borrower to NCLT.

Lenders were expecting that the RBI would dilute a condition requiring 100% of approval among lenders. They were also expecting that it would relax restructuring norms so that banks are not forced to drag borrowers like power companies to NCLT where the scope of recovery would be dim given the nature of the projects which had little liquidation value. (Source: The Economic Times)