Defaulters Beware, Banking Act Amended In Fight Against Bad Loans

The government today gave wide-ranging legislative powers to the Reserve Bank or RBI to issue directions to lenders to initiate insolvency proceedings for the recovery of bad loans. The much-awaited ordinance to amend the Banking Regulation Act was promulgated by President Pranab Mukherjee last night. The Cabinet had earlier given the nod for change in Banking Regulation Act. The stressed assets in the banking system have reached unacceptably high levels and urgent measures are required for their resolution, the ordinance said.

Indian banking system is grappling with mounting bad loans which had hit a record $150 billion as of end-December. Ratings agencies have voiced concerns over the levels of bad debts in the banking system. Despite the government's push for a ratings upgrade, ratings agencies have kept India's sovereign rating at the bottom rung of investment grade. Loan growth in the banking system plummeted to a whopping six decadal low of 5.08 per cent in fiscal 2017. The low advances growth is on account of the impaired balance-sheets of banks and weak demand for credit from industries.

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 non-performing assets (NPAs).

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

With the enactment of 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.

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.