The ordinance to amend the Banking Regulation Act, 1949, to tackle the menace of massive stressed assets in the banking system proposes more specific powers to the Reserve Bank of India, while the government intends to soon implement amendments to the Prevention of Corruption Act (PCA) to encourage bankers to take commercially bold decisions, especially on haircuts on toxic assets, without fear of subsequent prosecution. While the RBI already has adequate “general power” under Section 35 A to give any direction to banks, the amendment to the Banking Regulations Act is being done to complement changes in the regulatory system following the introduction of the Insolvency and Bankruptcy Code (IBC), 2016, an official source told FE.
So the central bank could monitor specific cases, especially the more difficult ones, even when the resolution process through the IBC is under way. Bankers could also pursue the IBC mechanism more vigorously if other mechanisms — including S4A — to deal with the non-performing assets (NPA) issue don’t succeed. IBC provides for the turnaround of the assets or, in case of liquidation, their expedient monetisation, with secured creditors third in the preference order, after cost of resolution and workers’ dues.
The sources said the ordinance is a temporary measure and the government intends to present the amendments to the Banking Regulation Act as early as the next session of Parliament for clearance. Under the IBC, if a company has defaulted on a loan payment, the creditor (both financial or operational) or the debtor himself or even an employee of the enterprise can trigger the insolvency process. They have to approach the National Company Law Tribunal (NCLT) seeking an order to this effect, following which the corporate insolvency resolution process starts.
Also, irrespective of the person who initiates the insolvency proceedings, all others concerned in an enterprise are dragged into it and the committee of creditors will be formed. The proposed amendments to the PCA are aimed at encouraging bankers to work out haircuts on stressed assets and take other tough but bona fide decisions without apprehension of being probed by investigative agencies later. However, although changes are being proposed to deal with the NPA issues more effectively, the central bank may not allow let-up on provisioning by banks.
Also, the government intends to strengthen oversight committees (OCs) under the aegis of the RBI to monitor progress of NPAs, that too on a case-by-case basis. The OCs are expected to help banks with decision-making.
Finance minister Arun Jaitley had earlier said that 30-40 companies accounted for a major chunk of total NPAs with banks. As of December, 2016, commercial banks had stressed assets (gross NPAs and restructured standard advances) worth Rs 9.64 lakh crore, with most in public-sector banks. The massive bad debts have led to a twin balance sheet problem — overleveraged companies and bad-loan-encumbered banks — severely denting investments in the economy.
You might also want to see this:
Section 35 A of the Banking Regulations Act deals with the power of the RBI to give directions to banks. The section also makes it clear that the RBI may, on representation made to it or on its own motion, modify or cancel any direction to banks and may impose such conditions on them as it thinks fit. NPAs reached 9% of total advances by September 2016, double their level a year earlier. Importantly, more than four-fifths of the NPAs were in the public sector banks, where the NPA ratio had touched almost 12%. A sample of 39 top banks showed NPAs accounted for Rs 6,97,409 crore — or 9.3% of their advances — as of December 2016.
Earlier in the day, finance secretary Ashok Lavasa said the amendments to the Banking Regulation Act would help in effectively resolving the bad loans problem. “It is not possible for me to put down a number on how this (NPAs) will go down but certainly we feel that these changes will make the system more effective in handling the bad loans,” he said.