A day after President Pranab Mukherjee signed an ordinance to amend the Banking Regulation Act, Finance Minister Arun Jaitley Friday said the government has moved to change the “status quo” on the festering issue of non-performing assets (NPAs).
The ordinance empowers the Reserve Bank of India (RBI) to specifically direct banks to initiate insolvency resolution process and winding up petitions against defaulting companies under the Bankruptcy Code.
This is expected to speed up the NPA resolution process, as the Bankruptcy Code provides for a time-bound winding up of companies and recovery of loans. The government and the RBI have already prepared a list of top 40-50 loan defaulters against whom action can be initiated.
“The object of this Act is that the present status quo can’t continue. And the present status quo is that not much was moving and, therefore, a paralysis in the name of autonomy is detrimental to the economy and that really requires to be changed,” Jaitley said.
The President signed the ordinance late Thursday and it was notified in the government gazette Friday.
The RBI can also set up multiple oversight committees to aid banks in resolving stressed loans, as per the ordinance. Since these committees will be set up by the RBI and ratify resolution of any particular account, bankers working on such cases will have the comfort that they will not face any investigative backlash in future on their decisions to resolve bad loans through haircuts in values.
The government is also working on other decisions relating to amending the framework joint lenders forum (JLF) to ensure faster resolution of bad loans, Jaitley said, without elaborating. Sale of assets, closure of non-profitable bank branches, reduction of overhead and business turnaround initiatives will be part of resolution process, he said.
Even as the government was able to bring in structural reforms in the economy in the last few years, one of the key problems which remains is that of stressed assets, Jaitley said, adding that the “banks necessarily need to be in a robust position to support growth”.
The government has inserted two new clauses — Section 35AA and Section 35 AB — in the Banking Regulation Act to empower the RBI.
Section 35 AA says that “the central government may by order authorise 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, 2016.”
“The order of the Central government authorising the RBI in relation to exercise of jurisdiction under 35AA also has been issued today separately,” Jaitley said. Section 35 AB says that “the Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.”
The RBI is now expected to take sector specific measures to deal with the NPAs, which have risen despite the government taking a series of measures in the recent months.
“Empowering the RBI with an explicit mandate should reorient various stakeholders for effective NPA resolution. The country and its banking system need to move quickly and decisively to take benefits of these enabling provisions,” State Bank of India Chairman Arundhati Bhattacharya said Friday.
Scheduled commercial banks’ total stressed assets, which comprise gross NPAs as well as restructured standard advances, were at Rs 9.64 lakh crore as on December 31, 2016, as per Finance Ministry data. Bad debts have risen sharply in the state-owned banks, while private banks registered somewhat lower jump in NPAs in the nine months in 2016-17.
Public sector banks NPAs surged by over Rs 1 lakh crore during April-December period of 2016-17. PSU banks’ gross NPAs rose to Rs 6.06 lakh crore by December 31, 2016, from Rs 5.02 lakh crore during the entire year of 2015-16. For private sector banks, gross NPAs grew to Rs 70,321 crore by December 31, 2016, from Rs 48,380 crore as on March 31, 2016.
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