RBI gets booster shot to tackle NPAs

The government on Friday gave wide-ranging legislative powers to the Reserve Bank of India 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 Regulation Act 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.

The 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 the 3Cs -- CBI, CAG and CVC.

With the enactment of the amendment, RBI will be able to give specific solutions with regard to hair cut for specific cases and also, if required, look at providing relaxation in terms of current guidelines.

Finance Minister Arun Jaitley had in March said that the government would consider setting up multiple oversight committees under the RBI to examine the cases of NPAs referred by banks.

"The RBI has made an oversight committee to look into the process of cases referred to it by the different banks," he had said.

Seeing the response and its performance, the finance minister had said that the government was considering the multiplication of such committees.

The ordinance will ensure the 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 government had earlier enacted the IBC to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner. It was aimed at maximising the value of assets to promote entrepreneurship, availability of credit and balance the interest of all stakeholders.

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