A Supreme Court bench comprising of Justices R F Nariman and Vineet Saran has quashed an RBI circular which made it compulsory for banks to immediately take action to either resolve bad loans over Rs 2,000 crore or to initiate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), reports The Economic Times.
In effect, the circular had taken away the discretion of banks to not take action in case of such bad loans. The bench reasoned that considering section 35AA of the Banking Regulation Act, the RBI could not have come out with such a generic directive to mandate reference under the IBC.
The apex court also noted that reference under the IBC must be made on a case-by-case basis, and needs to have the authorisation of the Centre.
The court’s striking down of the circular will also mean that all consequential proceedings begun under Section 7 of the IBC will also be terminated.
The circular had been challenged by several sectors such as power, sugar fertiliser, etc. from particularly the unregulated industries, on the ground that the directive was ultra vires as it categorised them as wilful defaulters. Their contention was that they were ‘stressed’ due to external reasons not under their control and thus cannot be termed as wilful defaulters.
Bad loans of about Rs 2.2 lakh crore are estimated to be affected by the court’s judgment.