RBI May Be Given More Powers Under New Bad Loan Resolution Plan

The Union Cabinet has approved amending the Banking Regulation Act, 1949, to deal with the problem of non-performing assets for banks, according to a senior government official. Another official from the finance ministry said the the Reserve Bank of India (RBI) will get more power to take action against defaulting companies.

Earlier Finance Minister Arun Jaitley, said the Cabinet has sent a proposal to deal with the resolution of bad loans to the President Pranab Mukherjee. The details of the plan will be made public after the President gives his assent.

Indian banks have been grappling with a large pile of non-performing assets and various proposals have been floated by the government and Reserve Bank of India (RBI) officials including RBI Deputy Governor Viral Acharya's suggestion to set up a resolution agency. Chief Economic Adviser Arvind Subramanian had also made a similar proposal on a “bad bank” in his Economic Survey tabled in Parliament in January.

In March this year, the government had said it was considering setting up an overseeing committee to vet large bad loan restructuring deals.

The chairman of the country's largest public sector lender Arundhati Bhattacharya, had also welcomed such a move in an interview to BloombergQuint, saying it would provide comfort to bankers at a time when lenders need to take deep haircuts on stressed assets.

Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services told BloombergQuint that setting up an overseeing committee, which has the powers to overrule the decision of a bank board, would need an amendment to the Banking Regulation Act. Equally, any powers given to the Reserve Bank of India to direct banks to deal with any one account in a specific way would also need a change in the Act.

“While we do not know what is coming, we need an air-tight solution,” said Parekh.