The Banking Regulation (Amendment) Ordinance, 2017, which was promulgated on 5th May 2017, introduces two new Sections (viz. 35AA and 35AB) after Section 35A in the Banking Regulation Act, 1949. The first section enables the Union Government to authorise the Reserve Bank of India (RBI) to issue directions to any bank to initiate an insolvency resolution process against the borrower who has defaulted on payments. The second section gives the apex bank the right to form oversight committees comprising members handpicked by the regulator to “advise banking companies on resolution of stressed assets”.
The burgeoning NPA problem of the banks had been putting pressure on the balance sheet of the banks and has also restricted their capacity to lend for the development of the Indian economy. The passage of the Ordinance Bill to amend the Banking Regulation Act by the Hon’ble President of India has given more teeth to the RBI to help banks in tackling the NPAs. Considering the prevailing NPAs situation and the problem in recovery of loans, the amendment will empower RBI to assist banks in recovering the unrecoverable loans by allowing sell-off of the collaterals to PSUs in the same sector.
Against the earlier provision of issuing general directions to banks, the RBI can now issue borrower-specific instructions to banks to initiate the resolution under the provisions of the Insolvency and Bankruptcy Code 2016. The government, on its part, has enabled the RBI to issue such directions.
The promulgation of the ordinance by the Union Government will have a direct impact on the effective resolution of stressed assets, particularly in consortium or multiple banking arrangements, as the RBI will be empowered to intervene in specific cases of resolution of non-performing assets, to bring them to a definite conclusion. This is a much-needed step that will help revive stranded assets and resume credit flow to industry. Moreover, the move is expected to speed up the NPAs resolution process, as the bankruptcy code provides for a time-bound winding up of companies and recovery of secured loans.
The ordinance, which was approved by President Pranab Mukherjee, also empowers the central bank to issue other directions for resolution, and appoint or approve for appointment, authorities or committees to advise banking companies for stressed asset resolution. Changes have also been built into the ordinance to ensure that bankers who opt for resolution of bad debts and take haircuts on loan values are protected from any regulatory backlash.
The move of the union government to promulgate the ordinance comes after clarion calls from lenders who have been facing rising NPAs despite the government taking a series of measures in the recent months. Scheduled commercial banks’ total stressed assets, which comprise gross NPAs as well as restructured standard advances, stood at Rs 9.64 lakh crore as on December 31, 2016, as per finance ministry data. Bad debts have risen sharply in state-owned banks while private banks have registered a relatively lower spike in NPAs in the fiscal year. Accordingly, the ordinance states that it is being enacted as stressed assets in the banking system have reached “unacceptably high levels”, and therefore, urgent measures were required for their resolution.
Meanwhile, the government remains committed to the speedy resolution of the problem of stressed assets in the banking system as it is holding up private investment in the country and therefore, growth in many sector. Apart from this ordinance, several other steps have been taken by the government to solve this problem. For example, the recent enactment of Insolvency and Bankruptcy Code (IBC), 2016 has opened up new possibilities for time bound resolution of stressed assets. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and Debt Recovery Acts have also been amended to facilitate recoveries. A comprehensive approach is being adopted by the government for effective implementation of various schemes for timely resolution of stressed assets.
Source: CII Economy Matters – April 2017