Fewer default cases may head to NCLT

The squashing of RBI’s February 12 circular is likely to see fewer default cases being referred to the National Company Law Tribunal (NCLT), central bank coming out with revised prudential norms and banks getting a major relief in terms of provisioning for bad assets.   

However, most experts said they would wait for the detailed judgement and response of RBI before deducing the impact of the SC’s order on the banks and borrowers.

“Automatically, the number of cases going to the NCLT under Insolvency and Bankruptcy Code (IBC) law will get reduced with this judgement. The RBI governor had said he will not dilute the circular. Now, he will have to go by the SC ruling,” said a banking analyst with a leading management consultancy, who did not want to be named as he is working with several banks.

A former banker, who spoke anonymously to DNA Money said the SC had used the word “unconstitutional” to establish the constitutional rights of the borrowers that had been breached by central bank’s directives issued last year.

“What are reasons the SC has found for treating the RBI circular as unconstitutional. Unconstitutional is a strong word. It must be saying that it is going against the established rights of the borrowers,” he said.

The ex-banker expects the “the position” before the RBI circular to be restored following the SC order. “If the SC court order is followed then till the account become out-of-order after 90 days, no action can be taken for declaring it as NPA.” 

“As there will now be no automatic route to refer the case to NCLT, banks will have to follow a certain basic rule to refer a case to NCLT,” the ex-banker added.

Kalpesh Mehta, partner at Deloitte Haskins & Sells, told DNA Money with the cancelling of the earlier circular, the RBI will have quickly issue guidance for financial reporting for March. “Because March reporting is round the corner – within a week or 10 days. All banks will have to start recognising provisioning against the circular and reporting those numbers,” he said.

Mehta said while dilution of RBI’s provisioning norm may offer some respite to banks it may not necessarily be done away with as there were guidelines by other authorities like the Securities and Exchange Board of India (Sebi) that will be required to be adhered to.

“Making a provisioning is a measure of prudence for the banks. One has to see whether it was because of regulatory guidelines that they were making the provisions or whether the asset quality has actually deteriorated. Sebi guidelines also require to make provision based on doubtful, sub-standard assets and losses. That guidelines was always there,” he said.

Mehta said until the RBI came out with its decision on whether it was withdrawing the guidelines or not, SC’s ruling will remain as “a matter legal judgement” for the banks in the absence of guidance by the central bank.  

He said RBI had the option to appeal for a four-judge bench against two-judge bench judgement; “This will be the banking regulators course of action if it believes it had taken the right measure at that point in time”.

Cyril Shroff, managing partner, Cyril Amarchand Mangaldas, called it a “major development” and said it showed how proactive the judiciary has been. “Whilst it’s too early to say, but if banks voluntarily still invoke IBC - the practical impact will be minimal,” said Shroff.