Bad debt norms: RBI to seek Election Commission nod

MUMBAI/NEW DELHI: 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. 69087948 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. The quashing of the circular also makes it difficult for lenders to enforce their original plan of Jet Airways where they would convert one rupee of debt into 50% of the company’s equity.In 2014, the central bank had sought the Election Commission’s permission before announcing the grant of in-principle approval of bank licences for Bandhan and IDFC banks before voting began. It was only after the EC cleared the announcement that the RBI issued its press release.Earlier this month, SBI cancelled an event to announce carving out a new Mumbai Metropolitan Circle from its Mumbai region out of concern that it might violate the EC code of conduct. This was despite the work for bifurcation starting in 2018. According to sources, the RBI is keen to ensure that the current momentum of initiating insolvency proceedings against defaulters is not lost.

from Economic Times http://bit.ly/2ULVpSv