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Govt may direct state-run banks on bad debt after court's rejection of RBI rules
Photo Credit: Reuters

The government could issue directions to state-run banks to resolve corporate default cases and ensure there is no tampering with the pace of cleaning up bad debt, a finance ministry source said on Wednesday.

The statement from the official comes a day after the Supreme Court quashed a central bank order on resolving bad debt cases.
India's top court had quashed a Reserve Bank of India (RBI) circular on resolving bad debt on Tuesday, throwing the country's still-nascent bankruptcy regime into question.

"The order does not question the power of government to give directions to banks," said the government official, who requested anonymity.

Under the law, the government can still provide directions to banks to resolve corporate default cases, even as the court withdrew the RBI's power to push more large loan defaulters toward bankruptcy courts, the official told reporters.

The Supreme Court order will provide the banking system with more flexibility and time in resolving the stressed assets, research firm CRISIL said, adding that expectations for a quick resolution could come under a cloud.

The RBI circular had directed banks unable to agree upon a resolution plan with any defaulter within 180 days to drag the defaulter into a time-bound insolvency process.

"We will not let insolvency and bankruptcy processes be weakened," the official added.

CRISIL, however, said the Supreme Court's decision will not have a significant impact on new bad debt accretion levels as most of them have been recognised by the banking sector.

Indian banks and financial institutions currently hold a total bad debt of over 10 trillion rupees ($146 billion). This has affected their ability to lend more and spur economic growth.

The Supreme Court verdict also gives more time to bankers to resolve stressed loans in thermal power plants, outside the bankruptcy court, the official said.

In 2017, a report by a Indian Parliamentary Committee had identified 34 strained power projects. The overall capacity of these projects stood at about 40,000 megawatts with a total outstanding debt of nearly 1.75 trillion rupees.

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