Supreme Court RBI Ruling: Supreme Court ruling to slow down resolution of stressed assets: Rating agencies

Both Crisil and Moody’s have voiced their concerns on the impact of the Supreme court ruling.

Updated: Apr 03, 2019, 10.05 PM IST

Getty Images

The provisions in the supreme court ruling is credit negative for banks, says Moody’s.

Mumbai: The Supreme court ruling which relaxes RBI’s February 2018 guideline on NPA resolution is expected to impact credit discipline adversely and slowdown resolution of

stressed assets

, according major rating agencies.

Both Crisil and Moody’s have voiced their concerns on the impact of the Supreme court ruling which diluted Reserve Bank of India’s directive on its February 2018 circular on NPA resolution. “The improvement in credit discipline in the past year and the expectation of quick turnaround in stressed assets resolution could come under some cloud” a release by Crisil said. “ That’s because the RBI circular prioritised speedy resolution of stressed assets. Also, fear of losing control of their companies meant promoters worked actively with lenders to avoid referral to NCLT”

On April 2, the Supreme Court passed a judgment that declared a circular issued by the Reserve Bank of India on the recognition and resolution of stressed loans was exceeding the RBI’s authority, effectively voiding it.

The RBI circular had mandated referring stressed assets to the National Company Law Tribunal (NCLT) if the banks were not able to implement a resolution plan within 180 days from the date it became overdue. While the RBI circular intended to speed up the resolution process, the apex court’s ruling now puts the onus back on banks for ensuring timely and effective resolution of stressed assets, according to Crisil. The provisions of the Insolvency and Bankruptcy Code (IBC), though, continue to be available to them for such resolution.

The provisions in the supreme court ruling is credit negative for Indian banks, according to global rating firm Moody’s, as it will weaken stressed loan recognition and resolution for large borrowers, and delay the resolution process of some existing large nonperforming loans (NPLs). Following the Court judgment, banks and borrowers will regain flexibility in resolving stressed loans. In the past, this flexibility caused the recognition and resolution of stressed loans to be postponed. Hence, the voiding of the 12 February circular is credit negative, Moody’s said.

But the Supreme Court ruling is not expected to have any significant impact on new NPA accretion levels, as accelerated NPA recognition by banks has resulted in most of the stressed assets being recognised. However, the pace of reduction in the stock of NPAs could slowdown, Crisil said

Also Read

No dilution on Feb 12 circular over stressed assets: RBI

NTPC eyes stressed assets under insolvency in NCLT to make deals sweeter

ADIA to invest $500 million in Kotak’s stressed assets fund

JSW Cement eyeing acquisition of stressed assets

Commenting feature is disabled in your country/region.

Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service

Source

Author: Prakash Poojary

Business Analyst

Leave a Reply