New framework by RBI was unconstitutional
SC STRIKES DOWN RBI’S “FEBRUARY 12 ORDER”, SAYS IT’S UNCONSTITUTIONAL
What’s in news?
Supreme Court, stike down RBI’s February 12 order on stressed asset, as it was unconstitutional.
- In the month of February, the RBI issued an order aimed at resolution of stressed asset in the economy, including the certain specific schemes at different point of time.
- In view of enactment of Insolvency and bankruptcy code 2016, the RBI has decided to replace some of the existing guidelines with the harmonized and simplified generic framework for resolution of stressed assets. The circular stipulated a one-day default rule on term loans.
- As per the new framework, if a borrower missing repayment even for a day would be treated as a defaulter. Then the banks needed to finalize a resolution plan for defaults of over Rs 2,000 crore within the next 180 days, failing which the insolvency process would be initiated.
Insolvency and Bankruptcy Code, 2016:
- The Insolvency and Bankruptcy Code seeks to create a unified framework to resolve insolvency and bankruptcy in India.
- The Code covers Insolvency, Liquidation, Voluntary Liquidation And Bankruptcy. The bill makes it easier for weak companies to exit or restructure their businesses.
- Insolvency is the situation where the debtor is not in a position to pay back the creditor. Bankruptcy is the legal declaration of Insolvency. So the former is a financial condition and latter is a legal position. All insolvencies need not lead to bankruptcy.
- India’s new Bankruptcy Bill attempts to create a formal insolvency resolution process (IRP) for businesses, either by coming up with a viable survival mechanism or by ensuring their speedy liquidation.
- The Business/Debtor and also lenders & creditors can initiate IRP.
- The Bill envisages a new regulator called the Insolvency and Bankruptcy Board of India.
Need for an insolvency and bankruptcy code 2016:
- Indian banks are sitting on a huge pile of bad debts. The total Non-Performing Assets (NPAs) is around 4 Lakh Croreand a huge amount of restructured loans also. Thus the total stressed assets (Bad Debts) amount to 11% of the total lending.
- As a percentage of total loans, the bad loans grew from 3.49% (2013) to 8.3 %(2015).
- Corporate bad loans constitute 56% of the totalbad loans of state-run banks.
- At present, there are around 70000 pending liquidation.
- There are around 12 laws maximum of 100years old, to tackle Insolvency.
- As per World bank’s Report, India’s ranking is,
- 77/190 countries in ease of doing business.
- 136/190 countires in resolving insolvency.
- A stressed asset is an indicator of the health of the banking system.
STRESSED ASSET = NPA+ RESTRUCTURED LOANS+ WRITTEN OFF ASSETS.
- Assets of the banking system comprises of loans given and investment in bonds made by banks.
- Quality of the asset indicates how much of the loans taken by the borrowers are repaid in the form of interests and principal.