Recovery of bad loans, a millstone around the neck of Indian banks, had gathered momentum after years of dithering when the Prime Minister Narendra Modi-led NDA government empowered the Reserve Bank of India (RBI) last month to direct banks to take big defaulters through the process prescribed under the Insolvency and Bankruptcy Code that specifies time-bound resolution.But the government’s bold move to resolve the stressed banking assets has run into a unique legal challenge, which can set precedents for future.Cracking down on bad loans, the RBI last month identified 12 accounts for insolvency proceedings with each of them having over Rs 5,000 crore of outstanding loans, accounting for 25 per cent of total non-performing assets ( NPAs ) of banks.But one of these 12, Essar Steel Ltd., controlled by the billionaire Ruia brothers, found the RBI’s move as “hostile, arbitrary and unreasonable” and moved court against the decision.The Gujarat High Court has adjourned the matter against Essar Steel to tomorrow.While the RBI asked banks to immediately refer 12 corporate accounts, including that of Essar Steel, to the bankruptcy court, it directed banks to resolve 488 other cases through loan and asset restructuring in six months. In case this does not happen, these cases are also to be referred to the bankruptcy court.But the Essar group wants more time from the RBI to close its restructuring package with banks for Essar Steel Band has termed as unfair the regulator's decision to refer the firm to the bankruptcy court.Essar Group director Prashant Ruia says that Essar Steel should be given time like 488 other cases.“Based on our performance in the last 15 months since the cutoff date indicated in the press release, in fairness, we believe that we should be included in the second category of 488 companies which have been provided a period of six months to restructure the loan and not be expressly sent to NCLT with the potential risks of a deterioration in the operations of the company,” Ruia said in an exclusive interview with ET.Ruia argues that Essar Steel’s operational performance has improved in the past one year and that it should be given more time to close its restructuring package with lenders agreed to in January this year.The Indian banking system is saddled with sticky loans. Bad loans at state-run banks have increased by more than Rs 1 lakh crore since April 2016 to Rs 6 lakh crore as of December 31. This goes up to Rs 10 lakh crore when those of private and other lenders are added on.The stressed assets of Indian banks are likely to increase to 15% of total loans by March 2018 amid rising requirements for regulatory capital until 2019, S&P Global ratings said in a report recently.There was hope that the NDA government’s bold move will cure the banks of long-pending problem that weighs down on the country's overall growth. But the legal challenge mounted by Essar Steel has created uncertainty around the process.If the court decides in favour of the Essar group, the government will have to rework its moves.