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Supreme Court quashes RBI’s 12 February Circular on NPA

Supreme Court quashes RBI’s 12 February Circular on NPA


  • GS 3 || Economy || Banking & Financial Sector || RBI

Why in news?

  • The central bank’s controversial ‘February 12 circular’ — which tightened the framework for the resolution of stressed assets — has been struck down by the Supreme Court.

“February 12 circular”

  • Through a notification issued on February 12, 2018, the RBI laid down a revised framework for the resolution of stressed assets, which replaced all its earlier instructions on the subject.
  • The circular went into effect on the same day that it was issued, and all existing schemes for stressed asset resolution were withdrawn with immediate effect. These included –
    • Framework for Revitalising Distressed Assets,
    • Corporate Debt Restructuring Scheme,
    • Flexible Structuring of Existing Long Term Project Loans,
    • Strategic Debt Restructuring Scheme (SDR),
    • Change in Ownership outside SDR, and
    • Scheme for Sustainable Structuring of Stressed Assets (S4A).
  • All these schemes allowed more lenient terms of resolution than the February 12 circular, which specifically said that the resolution process must begin from day one of the default.
    • The circular introduced a new one-day default norm
      • “As soon as there is a default in the borrower entity’s account with any lender, all lenders — singly or jointly — shall initiate steps to cure the default”.
    • The circular was ostensibly intended to stop the “evergreening” of bad loans — the practice of banks providing fresh loans to enable timely repayment by borrowers on existing loans.
    • Banks were required to immediately start working on a resolution plan for accounts over Rs 2,000 crore, which was to be finalised within 180 days. In case of non-implementation, lenders were required to file an insolvency application.
    • The RBI warned banks that not adhering to the timelines laid down in the circular, or attempting to evergreen stressed accounts, would attract stringent supervisory and enforcement actions.
    • The government had earlier asked the RBI to make sector-specific relaxations in the timeline for the implementation of the circular.


  • Several companies from the power and shipping sectors had challenged the circular, arguing that the time given by the RBI was not enough to tackle bad debt.
  • Power producers, for instance, had argued that the RBI’s ‘one-size-fits-all’ approach was impractical since the sector was having to confront external factors that were beyond its control, and which made an early revival difficult for them.
  • These factors included the unavailability of coal and gas, and problems arising out of the failure of state governments to honour power purchase agreements.
  • The total debt impacted by the circular was estimated at Rs 3.8 lakh crore across 70 large borrowers, including Rs 2 lakh crore across 34 borrowers in the power sector.
    • As of March 31, 2018, 92% of this debt had been classified as non-performing, and banks have made provisions of over 25-40% on these accounts..

Supreme Court order

  • The Supreme Court held the February 12 circular “ultra vires as a whole” — essentially meaning the RBI had gone beyond its powers — and thus “of no effect in law”.
  • The order provides immediate relief to companies that have defaulted in repayments, especially those in the power, shipping and sugar sectors.


  • Many financial sector experts argued that the verdict could delay the process of stressed assets resolution, which had of late picked up pace.
    • Since banks will have the choice of devising resolution plans or going to the National Company Law Tribunal under the IBC, the urgency that the RBI’s rules had introduced in the system could be impacted.
  • Voiding of the February 12 circular is credit negative for Indian banks. The circular had significantly tightened stressed loan recognition and resolution for large borrowers.
    • But with the voiding, this may now have to be watered down.
    • The resolution of stressed loans impacted by the circular will be further delayed as the process may have to be started afresh.

Mains question

  • Quashing of the ‘February 12 circular’ issued by the RBI could undo credit discipline in the banking system. Analyze.