by Chaaru Gupta and Namrata Jeph

It is imperative that the legal decisions be taken keeping in mind the economic impact of those decisions. A lack of economic analysis of a judgment can affect employment, Gross Domestic Product (“GDP”), tourism, infrastructure, etc.[1] In recent times, the Reserve Bank of India has introduced multiple reforms to tackle the economic implications of the lockdown and ensure growth can be maintained in the long run. One such measure involves allowing financial institutions to grant a moratorium on installments that become due between Mar 1 and May 31 through a circular dated 27th March 2020. The Supreme Court did not interfere instead merely asked for its implementation in letter and spirit. However, this is not the case every time. In this article, we shall discuss one instance a legal pronouncement by the Supreme Court adversely affected the economy.

RBI Circular on Stressed Assets Management

The Reserve Bank of India on 12th February 2018 released a circular stipulating that banks had 180 days to come up with a debt resolution plan for loan accounts of Rs. 2000 crore and more, failing which the respective company would have to undergo insolvency proceedings under Insolvency and Bankruptcy Code, 2016. It also defined different resolution plans and directed lenders to share data on certain defaulters with the central bank’s database every Friday. The circular mandated referring stressed assets to the National Company Law Tribunal (NCLT) if the banks were not able to implement the resolution plan within 180 days from when it became overdue.[2] Its objective was to enhance the momentum of resolution of ‘stressed assets’ and adherence to the credit facility.[3] It created a prospect of recovering Rs. 3.8 lakh crore of stressed loans of over 70 large borrowers.

However, it all became uncertain when the Supreme Court of India in Dharani Sugars and Chemicals Ltd. v. Union of India,  quashed the said circular by stating that it was ultra vires of the law and therefore void.This implied revocation of the automatic insolvency proceedings as proposed by  the circular.

Adverse Impact on Economy

The ruling had a negative impact on the Indian economy as the decision to tackle bad loans was  now left to the individual banks and there was no rush to push corporate defaulters to insolvency courts. Even according to a global rating firm Moody’s, the order was bound to have a negative impact as it will weaken stressed loan recognition and resolution for large borrowers, and delay the resolution process and some existing large non-performing loans (NPLs). 

Banks now have increased flexibility in finding a resolution; the order “does provide the borrowers with some leeway again to delay the resolution process”.It is important to note that Stressed assets in the banking system or non-performing assets have reached unacceptably high levels and hence, urgent measures are required for their speedy resolution to improve the financial health of banking companies for the proper economic growth of the country. Therefore, it is necessary to make provisions in the Banking Regulation Act, 1949 for authorizing the Reserve Bank of India to issue directions to any banking company or banking companies to effectively use the provisions of the Insolvency and Bankruptcy Code, 2016 for timely resolution of stressed assets.

Important Legal Provisions

The Supreme Court declared the impugned circular to be ultra vires Section 35AA of the Banking Regulation Act. However Section 21 makes it clear that the RBI may control advances made by banking companies in the public interest, and in so doing, may not only lay down policy but may also give directions to banking companies either generally or in particular. Similarly, Under Section 35A, vast powers are given to issue necessary directions to banking companies in the public interest, in the interest of banking policy, to prevent the affairs of any banking company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the banking company, or to secure the proper management of any banking company. These provisions are not excessive in any way nor do they suffer from want of any guiding principle.

When it comes to lack of any guidelines by which the power given to the RBI is to be exercised, it is clear from a catena of judgments that such guidance can be obtained not only from the Statement of Objects and Reasons and the Preamble to the Act but also from its provisions.

The regulatory regime laid down in the RBI Act and Banking Regulation Act must be construed broadly, being in the public interest, in the interest of banking policy, and above all, in the interest of depositors. Aforementioned, RBI Act and the Insolvency Code are intricately related to the operation of the credit system of the country, and must, therefore, be given an expansive interpretation.

The RBI Circular

The RBI Circular was an attempt to ensure that insofar as huge debts over INR 2000 crore are concerned, a reasonable period of six months is given by the banks to either resolve stress assets or if they cannot do so, the matter will have to be dealt with under the Insolvency Code. Clause 4 of the RBI Circular makes it clear that greater flexibility is given in this period of six months for banking and non-banking financial institutions to resolve stressed assets even dehors earlier restrictive circulars that have been done away with by the circular dated 12.02.2018 so that an effort be made to resolve stressed assets within a reasonable period, after which it becomes incumbent on such institutions to move the Insolvency Code.

The circular was not manifestly arbitrary, on the contrary, it was in the public interest and in the interest of the national economy to see that evergreening of debts does not carry on indefinitely. Therefore, these huge amounts that are due and owing should come back into the economy for further productive use. Either they can so come back within the six months’ grace period granted by the circular or through the route of the Insolvency Code.

Great leeway must be given to Parliament to deal with the problems which affect the national economy as a whole. There are adequate guiding principles and no manifest arbitrariness in any of the aforesaid provisions. Furthermore, there is no question of excessive delegation of power either, as guidance can be obtained from the Preamble of the Banking Regulation Act together with its provisions.


The judiciary, while undertaking the task of performing its judicial function, is also required to perform its role in the direction of ensuring that the country is on its path of economic development. The Courts need to avoid a particular outcome which has the potential to create an adverse effect on employment, growth of infrastructure or economy or the revenue of the State.

The promise of efficiency is the ultimate goal of all economic regulations.[4] Certain laws which promote this efficiency should be strengthened by the removal of the loopholes in the laws and a proper interpretation and implementation. There may be other laws and rules, which may weaken the fabric of the economy.[5] Nation’s laws should prevent poverty and deprivation by empowering individuals to assert the right to development.[6] Economic and social needs or benefits and advantages of individuals constitute the primary sources of values or norms guiding the ‘meaningful operation of justice’.[7]Declaring of the RBI circular as unconstitutional and ultra vires was on the completely procedural basis but in such situations, it becomes pertinent to note that when the question concerns with the economic development of the national courts should avoid the procedural technicalities and should provide broad interpretation to the statutes of public interest.

Views are personal.

Image credits: INITIUM Group


Chaaru Gupta and Namrata Jeph are currently pursuing BBA LLB (Hons) and BA LLB (Hons) from National Law University, Jodhpur. They are also the Founding Editor and Senior Editor at ELS Review, respectively.


[1] Alan Devlin, Law and Economics, 46 Ir. Jur 165 (2011).

[2]Giammarino, Ronald, et al., Market Valuation of Bank Assets and Deposit Insurance in Canada, 22 CAN. J. ECON. 109 (1989).

[3]Shruti J Pandey, Vishakha G Tilak and Bipin Deokar, Non-Performing Assets of the Indian Banks 48 Economic and Political Weekly 91 (2013).

[4]Law and Economics, (2002) 2 LW (JS) 25.

[5]Deepak Lal, Unintended Consequences: The Impact of Factor Endowments, Culture, and Politics on Long-Run Economic Performance, 83 AM. J. AGRIC. ECON. 795 (1998).


[7]Yubaraj Sangroula , Law and development :a new jurisprudential discourse challenges, prospects and initiatives to link  development to human rights 1 RFMLR (2014).

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