With the President’s assent to the Banking Regulation (Amendment) Ordinance, 2017, the Centre on Friday authorised the Reserve Bank of India (RBI) to direct banking companies to resolve specific cases of bad loans by initiating resolution process under the new insolvency law, where required.
The amendments through the ordinance inserted two new sections to the Banking Regulation Act to add to the sweeping powers already available to the central bank to direct banks under the Section 35 A of the extant Act and obviate any question on the authority of the RBI while it gives directions to banks, as it deems fit, to deal with massive stressed assets. The central bank can now give directions on even specific cases of default, a practice it had generally avoided earlier.
And the central bank promptly followed up on the Centre’s move by issuing a new set of rules to banks, essentially to make the joint lenders’ forums (JLFs) work more efficiently, pragmatically and in a time-bound manner.
Also, with the RBI’s backing on triggering insolvency, banks will be encouraged more to invoke the Insolvency and Bankruptcy code (IBC), 2016, to seek resolution of stressed asset cases if other mechanisms such as S4A don’t work. 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.
Alough banks are currently allowed to invoke the IBC on their own, they have hardly used this facility, with only one case admitted by the National Company Law Tribunal (NCLT) so far (in a matter of Innoventive Industries; ICICI Bank was the creditor).
While the new Section 35AA inserted by Friday’s Ordinance empowers the government to authorise the RBI to issue directions to banks as it deems fit to initiate insolvency process in case of a default under the provisions of the IBC 2016, the Section 35 AB gives power to the RBI to specify one or more authorities or committees to advise banks on resolution of stressed assets. This means oversight committees (OCs) under the aegis of the RBI will be able to help banks with decision-making and also monitor the progress on stressed assets (both non-performing assets and restructured standard advances) that touched an unprecedented Rs 9.63 lakh crore by December 2016. NPAs with public sector banks alone are reckoned to be over Rs 6 lakh crore.
This will also lead to more sector-related oversight panels that will also shield individual bankers from subsequent investigation by probe agencies in future.
“And therefore a committee which oversees such JLF arrangements is one step which will give them (bankers) this comfort level,” finance minister Arun Jaitley said. FE had reported the proposed changes through the ordinance on Thursday.
Jaitley said IBC 2016 has opened up new possibilities for time-bound resolution of stressed assets, while the Sarfaesi and debt recovery acts have been amended to facilitate recoveries.
However, while seeking response from the RBI on disclosure of names of big defaulters in a case on Friday, the Supreme Court observed defaulters cannot be exonerated via insolvency proceedings.
Also, experts said the latest move alone may not solve the problem and must be followed up with more measures in a credible and time-bound manner. Former revenue secretary NK Singh said a detailed action plan with credible time frame has to follow the amendments, while former RBI governor HR Khan told a TV channel the insolvency structure is in a nascent stage at present, and there is an urgent need for more focused and dedicated NCLT benches to look at insolvency cases. Noted insolvency lawyer Sumant Batra, however, expressed reservations if the central bank, being a banking regulator, indeed has enough expertise to ascertain if insolvency in a particular default case must be triggered.
The ordinance, which amends Section 35A of the Banking Regulation Act, will now be placed in Parliament for approval in the upcoming monsoon session. Speaking to reporters, Jaitley said: “The object is that status quo can’t continue, and the status quo is that not much was moving. A paralysis in the name of autonomy (of banks) is detrimental to the economy. So that status quo really required to be broken.”
He said an amendment is proposed to the prevention of corruption Act, which has been introduced in Parliament. The standing committee has submitted its report on it, and the amendment will come up for approval of both the Houses soon. “Some other steps also being taken, which, once decided, will be communicated,” he added.
Asked if North Block’s role is being squeezed and more power is being given to the central bank to deal with stressed assets, the finance minister said, somewhat jokingly: “Whenever North Block has without power interfered in the banking system, it hasn’t done very good.”
The government is also planning to modify MoUs with public sector banks, imposing stricter conditions on those that seek recapitalisation. Such conditions could include better NPA management, sale of non-core assets and closing of loss-making branches.
Earlier, speaking to FE, Insolvency and Bankruptcy Board of India chairman MS Sahoo had said: “Banks as creditors, in fact, have many options to recover loans. Being sophisticated creditors, they evaluate suitability of various options in a particular case and choose the one that works the best for them. The code provides creditors an additional option to resolve insolvency, while they may resolve insolvency even outside the code.”
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 NCLT, seeking an order to this effect, following which the corporate insolvency resolution process starts.