RBI’s One-Day Default Rule: Delhi HC Notice On Petition Against ‘One-Size-Fits-All’ Approach

The Delhi High Court has issued notices to the Centre and the Reserve Bank of India on a petition challenging the controversial ‘one-day default rule’ stipulated by the  (RBI) wherein even a day’s delay in repayment of term loans would be considered as default and banks will have to report it to the RBI.

The petitioner prayed that the circular dated 12.02.2018 issued by RBI numbered RBI/2017-18/131 be quashed declaring the same to be arbitrary, unconstitutional and violative of Articles 14, 19(1)(g) and 21 of the Constitution insofar as it effectively reduces the default reporting provisioning window in the banks to a mere 1-day default from the existing standard of ninety (90) days.

The petition moved by the All India Bank Officers Confederation (AIBOC) challenges the February 12, 2018 circular issued by the RBI stipulating the one-day default rule saying the operation of asset classification and provisioning norms, stringent as they are, effectively called upon lenders, including public sector banks, to flag and report accounts as special mention accounts even on one-day default and take all necessary follow-up measures to cure the default and provision for the same were adversely affecting the profit perception of the banks.

"The operation of the Impugned Circular, amounting to considering even a single day default by a loanee, without regard to relevant factors including the nature of the loan and the existing security against tendered by the loanee against the said loan, to be reported and treated on par with a Non-Performing Asset (“NPA”) and to make provisions for the same in the Bank’s books is irrational, unscientific, grossly disproportionate and that the same would hurt the reported profits of the Banks and that the same would not only affect the viability of the Banking Companies and the health of the Banking Industry, in which the Petitioner organisation has paramount interest, but also adversely affect the livelihoods of members of the Petitioner organisation".

The petition, filed through advocate Prasanna S, contended that the resolution process prescribed by the circular in question was a one-size-fits-all approach because it withdrew all existing restructuring schemes and only provided for invoking the IBC process in disregard of many relevant considerations which were gone into detail by the parliamentary standing committee report on the issue.

Appearing for the petitioner, senior advocate Kirti Uppal showed to the court how the losses of the banks owing to higher provisions had dramatically increased in Q4 of the last financial year because of the operation of the said circular.

It is to be noted that the Rule in question requires banks to finalize a resolution plan within 180 days in case of a default so as to identify the potential stressed assets, in the beginning, itself to deal with bad debt and the banks had sought relaxation from the said rule.

The Petitioner also contends that the withdrawal of extant instructions on resolution of stressed assets, with effective mandate to resort exclusively to the process under the Insolvency and Bankruptcy Code, 2016 is irrational, manifestly arbitrary and ultra vires Article 14 read with Article 19(1)(g) of the Banking Companies inasmuch as it does not take into effect relevant factors such as other securitization options that the Banking Companies may possess or the performance of the IBC process in relation to recoveries from NPAs.

While issuing the notices, the court also directed the petitioner to show that it has a locus in the matter and why the issue was not raised by way of a public interest litigation.