In 2019, the Indian economy witnessed a decline in its growth rate with a slump in demand in various sectors such as real estate, aviation, construction and automobiles. Consequently, the Ministry of Finance was tasked to take measures to alleviate the growing concerns of the state of the Indian economy and the banking sector.
To improve the landscape of the Indian banking sector, the Finance Ministry announced the amalgamation of ten public sector banks into four major banks, subsequently reducing the total number of Indian public sector banks from 27 to 12. Once the merger takes effect, the enhanced capital base is expected to enable public sector banks to offer larger loans.
Following the recommendations made by the Bimal-Jalan expert committee, the Reserve Bank of India (RBI) decided to provide surplus funds to the Indian government which is expected to revive economic growth in a time of scarce consumer demand and scant investment.
Additionally, this year saw a significant overhaul in the process of stressed asset management. The RBI introduced a new framework for resolution of stressed assets – aimed at bringing about a change in the approach of banks to monitor exposures and resolution of non-performing assets. Simultaneously, the year saw major developments under the Insolvency and Bankruptcy Code, 2016 (IBC) through legislative amendments and important court decisions such as in the Essar Steel insolvency case which provided a much-needed closure to legal quagmires.
On 16 January 2019, the RBI introduced the new External Commercial Borrowings (ECB) framework, in supersession of its extant master directions.
The new ECB framework has simplified the three-track regime for ECBs into a dual framework governing foreign currency ECBs on one hand, and INR-denominated ECBs on the other. Additionally, masala bonds are also subsumed within the INR ECB framework. To further simplify the process, the following changes have been made under the new framework:
The RBI issued a revised circular on the framework for resolution of stressed assets on 12 February 2018 (February 12 Circular). This framework provided for early identification and reporting of stressed assets and strict timelines for resolution, failing which a petition would have to be filed under the IBC. However, the Supreme Court in Dharani Sugars and Chemicals Limited v. Union of India through its order dated 2 April 2019 struck down the February 12 Circular for falling foul of the Banking Regulation Act, 1949.
The Court referred to the Section 35AA of the Banking Regulation Act, 1949 that empowers the Central Government to authorize the RBI to direct any bank to initiate the corporate insolvency resolution process against debtors for a ‘default’ under the IBC. The Court held that section 35 AA of the Banking Regulation Act, 1949 refers only to specific defaults by specific debtors as authorised by the Central Government. However, February 12 Circular acted as a general direction to initiate IBC proceedings under certain circumstances without any specific authorisation and hence, failed to comply with the requirement stipulated under Section 35AA of the Banking Regulation Act, 1949. Therefore, the February 12 Circular was struck down and all proceedings initiated under it discontinued.
If you would like to receive content directly in your inbox from our knowledge repository, please complete this subscription form. This service is reserved for clients and eligible contacts.
Under the rules of the Bar Council of India, Trilegal is prohibited from soliciting work or advertising in any form or manner. By accessing this website, www.trilegal.com, you acknowledge that:
We prioritize your privacy. Before proceeding, we encourage you to read our privacy policy, which outlines the below, and terms of use to understand how we handle your data:
For more information, please read our terms of use and our privacy policy.