To RBI to deal with
NEW DELHI: The government on Friday notified changes to the Banking Regulation Act, giving the Reserve Bank of India (RBI) broad powers to deal with specific bad-loan cases as it tries to speed up resolution of ₹9.64 lakh crore of stressed assets clogging the Indian banking system.
Experts cautioned that this was just the first step in the process of putting the onus on the central bank to reduce the mountain of bad loans. The move could pose potential conflict-of-interest issues for the regulator, they said.
The ordinance, which was approved by the President late on Thursday, also gives the Centre powers to authorise the RBI to invoke the Insolvency and Bankruptcy Code against defaulters.
Separately, it also empowered the central bank to direct banks on its own to settle bad loans with defaulters, and to form oversight committees to deal with the issue.
The new rules are applicable with immediate effect and the centre has already issued a “general instruction” to the RBI to take action, finance minister Arun Jaitley said.
The central bank plans to set up a secretariat to oversee the resolution process for the biggest defaults, Bloomberg reported, citing a person it didn’t identify.
“When bankers take commercial decisions, they must have adequate comfort level,” said Jaitley, explaining the reasoning behind the oversight panels.
He brushed aside conflict-ofinterest concerns for the RBI, saying the move will expedite commercial decisions. “Paralysis in the name of autonomy needs to be broken,” said Jaitley.
Some experts say that giving more powers to the RBI to take what can be seen as commercial decisions could lead to a conflict of interest for the central bank. Typically, regulators are at arm’s length from commercial decisions of entities they regulate in order to preserve systemic stability. “To a certain extent there is a conflict of interest. But it will be a different role of the RBI. It doesn’t stop the RBI from correcting whatever wrong is happening in banks,” said MR Umarji, former chief legal advisor of the Indian Banks’ Association.
Stressed asset resolution has stalled, especially after the CBI arrested former bankers of IDBI Bank Ltd over a ₹950 crore loan given to Kingfisher Airlines.
“There was a proposed amendment to Prevention of Corruption Act introduced in Parliament. Standing committee has already considered it and submitted its report,” said Jaitley.
This new set of rules comes after previous efforts by the central bank such as the strategic debt restructuring scheme and the so-called sustainable structuring of stressed assets (S4A) didn’t find many takers, owing to their rigid framework.
“Banks couldn’t invoke the insolvency and bankruptcy code due to fear of being questioned. Now with the RBI directing banks to initiate insolvency (proceedings), this will be a transparent approach,” said Abizer Diwanji, partner and financial services leader at consulting firm EY.
Yet other experts pointed out that while the RBI has got enabling powers, errant borrowers still have the means to stall resolution. “The mechanism the RBI forms will still be constrained by the provisions of other statutes whether it be the corruption act, companies act or contract act,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services LLP.
There are also fears about whether pushing through resolution in a hurried timeline will lead to a crash in asset prices. While there is significant money waiting on the sidelines to buy stressed assets, deals have been few and far between owing to disagreements on valuation.