In a significant move, the Cabinet on Wednesday approved a proposal to amend Section 35 A of the Banking Regulation Act through the ordinance route to tackle bad loans. The ordinance, which has been sent to President Pranab Mukherjee for approval, will empower the Reserve Bank of India (RBI) to effectively deal with the mounting bad loans and give direction to banks on how to recover non-performing assets (NPAs) from loan defaulters. The move also comes in the wake of Vijay Mallya loan default case when he left the country before the banks could take action against him. An extradition process to bring him back to the country in the case is underway.
The bad loans figure in public sector banks (PSBs) have risen sharply in comparison to private sector banks. The bad loan of public sector banks jumped by over Rs 1 lakh crore during the April-December period of 2016-17. The gross NPAs of PSU banks’ in the first nine months of the current fiscal increased to Rs 6.06 lakh crore by December 31, 2016, from Rs 5.02 lakh crore during 2015-16. For private sector banks, gross NPAs rose to Rs 70,321 crore by December 31, 2016, from Rs 48,380 crore as on March 31, 2016. How
So how does the amended Banking Regulation Act will empower the RBI. Firstly, the amended Act will enable RBI to set up oversight panels that will shield bankers from later action by probe agencies looking into loan recasts. This is important as banks till now have been reluctant to resolve NPAs through settlement schemes or sell bad loans to asset reconstruction companies for fear of being hauled up by investigation agencies.
With the changed law RBI will be able to give specific solutions for specific cases and also, if required, look at providing relaxation in terms of current guidelines.
If sources are to be believed there could be a provision in the act that would make wilful default a criminal offence.
The amended Act may also provide for overhauling of the joint lenders’ forum (JLF) guidelines to facilitate quick decision making as it has become a delaying tool for big defaulters instead of being a resolution mechanism. As per the existing JLF rules, if a restructuring package is okayed by 75 per cent of creditors by value and 60 per cent of creditors by number, other banks have to go along with it.