The Gujarat High Court had banned trading in debts, the three private banks- ICICI Bank, Kotak Mahindra Bank and Standard Chartered Bank- have challenged this verdict of the court and have filed a petition in the Supreme Court.
On February the apex court will be hearing the case on buying and selling debts by the banks. The banking industry, which has comprehended its debts by assigning a value, stated that the practice is being followed in the international market.
However on January 12 the High Court in its verdict said that assigning debts by banks was not permissible under the Banking Regulation Act, 1949. The High Court pointed out the accomplished contracts of assigning debts were illegal and the assignee banks are not entitled to be replace for original lenders (assignor bank) in proceedings related to sick companies pending before courts.
But banks have alleged that the High Court order has undone the practical efforts of the RBI to permit the banking sector to deal with the negative fallout of increasing non-performing assets by opening a regulated secondary market for NPAs under the guidelines issued by the apex bank in 2005. Banks pointed out that they had identified sick loans (NPAs) and assign them for understanding at a value and this form of recovery is commonly practiced in the international market. They argued that they have been permitted by the RBI to sell debts with underlying securities.