In what comes as a major setback for the Reserve Bank of India (RBI), the Supreme Court (SC) on Tuesday declared the central bank's bad loan resolution framework called as February 12 circular as "unconstitutional". CNBC-TV18’s Latha Venkatesh explains the impact this could have and also the options before the RBI now.
RBI directed banks that if borrowers don’t pay within a specified period and if they default and you are not able to put a resolution plan then you have to take it to insolvency and bankruptcy code (IBC). If you read the judgement thoroughly, it says that RBI has the power to direct banks to take cases to IBC only with government permission.
The court has struck down the entire circular, although it has written objections to only one-two clauses in the circular.
In that case, even now banks have the ability to take defaulting cases to the IBC, it is just that they cannot quote the February 12 circular to take them to IBC. However, other provisions like one-day default and immediately informing the Central Repository for Information on Large Credit (CRILC) database are very useful parts of the February 12 circular.
The RBI should frame another circular to ensure that these parts of the February 12 circular are carried forward.