Millennium Post

With bad loans soaring, govt gives RBI much needed teeth

The government on Friday gave wide- ranging legislative powers to the Reserve Bank to issue directions to lenders to initiate insolvency proceedings for the recovery of bad loans.
Non-performing assets (NPAs) or bad loans of public sector banks (PSBs) have reached "unacceptably high levels" of over Rs 6 lakh crore, the bulk of which are in sectors such as power, steel, road infrastructure and textiles.

The much-awaited Ordinance to amend the Banking RegulationAct was promulgated by President Pranab Mukherjee on Thursday night.

The Ordinance authorises the "Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default under the provisions of the Insolvency and Bankruptcy Code (IBC), 2016".

It has also empowered RBI to issue directions to banks for resolution of stressed assets.

RBI has been equipped with powers to specify one or more authorities to advise banks for dealing with the problem of NPAs which, as per the Ordinance, "have reached unacceptably high levels and urgent measures are required for their resolution".

The law will also empower RBI to set up sector related oversight panels that will shield bankers from later action by probe agencies looking into loan recasts.

Banks have been reluctant to resolve NPAs through settlement schemes or sell bad loans with hair cut to asset reconstruction companies for fear of 3Cs – CBI, CAG and CVC.

With the enactment of the amendment, RBI will be able to give specific solutions with regard to a hair cut for specific cases and also, if required, look at providing relaxation in terms of current guidelines.
Reserve Bank has been given powers to identify specific loans gone bad and enforce quicker resolution with the government amending the banking law through an executive order, Finance Minister Arun Jaitley said on Friday.

He said a list of some of the stressed assets is already with the RBI and it is looking into it.

"Present status quo cannot continue. And the present status quo is that not much was moving," he said.

The Ordinance will ensure effective use of IBC 2016 for resolution of stressed assets and give a big boost to the government's efforts to cut down NPAs in the banking sector.

The ordinance, which amends Section 35A of the Banking Regulation Act 1949, will have to be placed in Parliament for approval in the upcoming monsoon session. It has inserted Section 35AA and Section 35 AB in the Act.

The Cabinet had approved promulgation of an ordinance to amend the Banking Regulation Act for resolution of the NPA crisis facing public sector banks on Wednesday. MPost
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