A Bill amending the Banking Regulation Act, 1949 has been tabled in the Parliament today. Once enacted into law, the Banking Regulation (Amendment) Bill 2017 is expected to replace the ordinance issued by the centre in May 2018.
The following are the highlights of the Bill.
The ordinance inserts provisions for recovery of outstanding loans as per which, the central government may authorise the Reserve Bank of India to direct banks to initiate recovery proceedings against loan defaulters.
These recovery proceedings will be under the Insolvency and Bankruptcy Code, 2016. The Code provides for a time-bound process to resolve defaults by either (i) restructuring a loan (such as changing the repayment schedule), or (ii) liquidating the defaulter’s assets.
The RBI may from time to time issue directions to banks for resolving stressed assets. Stressed assets are loans where the borrower has defaulted on repayment, or loans which have been restructured.
The RBI may specify authorities or committees to advise banks on resolving stressed assets. Members on these committees will be appointed or approved by the RBI.
The non-performing assets of banks have boosted to more than Rs 9 lakh crore and now RBI is being given power to refer the cases to Insolvency and Bankruptcy Board.
In June, RBI had identified 12 large loan defaulters who account for 25% of the total bad loans in the banking sector.
Currently, the RBI may issue directions to banks on grounds such as ‘public interest’ and ‘in the interest of banking policy’. The Ordinance gives RBI additional powers to direct banks to initiate recovery proceedings under the Insolvency and Bankruptcy Code, 2016.
Further, a majority of NPAs (88%) are in public sector banks where the central government is a majority shareholder. There are possibilities that the government could initiate recovery proceedings against defaulters without having to authorise the RBI to direct banks.
As the banking regulator, the RBI is responsible for maintaining financial stability, while banks have the flexibility to make business decisions. Currently, banks face certain challenges as part of recovery proceedings such as (i) lack of incentives among public sector bankers to recognise losses, (ii) fear of investigation in case of low recoveries, and (iii) insufficient capital to absorb losses. The Ordinance may not address some of these issues.
