Allahabad HC order on 12 February circular: Judiciary is finally acknowledging there can’t be exceptions in the fight against NPAs

The Allahabad High Court’s decision to deny any interim relief to private power companies with respect to the Reserve Bank of India’s (RBI) 12 February circular on bad loan resolution is bad for the many ailing power companies. They now face an increased chance of being dragged into bankruptcy proceedings and eventual liquidation if they fail to offer a convincing resolution plan in the next two to three months. But by sticking to the well-laid down rules of the RBI was just the right thing for the court to do to at a time when the banking sector is neck-deep in bad loans.

To ensure the fight against bad loans stays the course, it was necessary to have the RBI to proceed with strict rules. But, even if these firms are pushed to the National Company Law Tribunal (NCLT), the ultimate recovery of money will not be easy for the banks. The court verdict throws two immediate challenges for them: One, prepare for a significant increase in the provisioning of these loans should these loans actually go to the NCLT; second, find buyers for these candidates using the 2-3 months window before the cases are finally admitted to the NCLT for liquidation.

Only if banks, in coordination with the central government, manage to find a quick resolution plan will they be able to minimise their losses, else what lenders are looking at is huge haircuts on the outstanding exposure and more hit on the bottomline due to a spike in non-performing assets (NPAs).

The RBI circular gave banks 180 days for resolution and made the rules strict to the extent that even if the payments are overdue for a day, the banks have to identify stress in the concerned company. But the question that will haunt banks in the next two to three months will be,  where to find suitable buyers. Power firms’ problems that have dragged many of these companies to the brink of collapse are beyond just financial issues.

 Allahabad HC order on 12 February circular: Judiciary is finally acknowledging there can’t be exceptions in the fight against NPAs

Representational image. AP.

For instance, acquisition of land and lack of environmental clearances have paved hurdles for many companies. Availability of coal and disagreements with state-run firms on power purchase agreement is another grey area. This means there isn’t an easy escape from the present situation for banks and power companies. Also, it is almost certain that power firms may move the Supreme Court seeking a favorable verdict appealing against the Allahabad High Court order.

Regardless of this, the stress in the power companies is likely to continue until the sector-specific problems are addressed. The government will have to do its part to assist the sector to formulate an immediate resolution plan to rectify the pain points. It will also have to fork out more money as public sector undertaking (PSU) banks will need to be recapitalised to absorb the monetary loss in the event of major losses during the resolution process.

But, one big takeaway from the Allahabad High Court order is that the judiciary is finally acknowledging the sense of urgency in the bad loan resolution process in Asia’s third-largest economy and is not diluting the central bank’s fight against NPAs. As Edelweiss research said in a note on Tuesday, the judgment upholds RBI’s argument of remaining sector-agnostic while implementing the Insolvency and Bankruptcy Code.

“With RBI’s 12 Feb 2018 circular requiring a bank to refer the overdue account to NCLT if resolution plan is not agreed upon in 180 days of the account being overdue and deadline for the first batch of such assets being 27 August 2018. This essentially means the lenders will have to finalise the resolution plan for assets within the next 15 days or refer them for NCLT,” the note said.

This is important since, for years, courts have come in the way of the RBI and banks while they attempt to recover money from corporate defaulters. It is the same Allahabad High Court which once denied banks their first right on hypothecated collateral, leading to major confusion. In October  2014, the Supreme Court ruled that right to life outweighed right to do business rejecting State Bank of India's (SBI) petition challenging an Allahabad high court order directing sugar mills in Uttar Pradesh to sell the sugar stock hypothecated to SBI against loans to pay sugarcane farmers’ dues. Banks had the first right over the collateral, but the court order basically quashed banks’ fundamental right.

Now, by ruling in favour of banks to stick to the RBI plan, the Allahabad court has clearly acknowledged the importance of safeguarding the business fundamentals of the banking industry. The latest court order on power companies indicates a likely shift in the judiciaries basic approach while dealing with sector-specific bank NPA cases. The judiciary now seems to reckon that there can’t be exceptions in RBI’s NPA battle and it is important to let banks play by the rulebook. That is a major relief for the ailing banking sector that is often dragged to courtrooms by defaulting companies during bad loan recovery.

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Updated Date: Apr 03, 2019 12:31:41 IST