Bad Loans Battle Turns Bold

Asurge in the nonperforming assets (NPAs) of public sector banks—over Rs 6 lakh crore in December 2016—left the government no option but to take the bad loans bull by the horns. It notified the Banking Regulation (Amendment) Ordinance, 2017 , which brings about two key changes to the Banking Regulation Act. First, it gives the RBI the authority to issue directions to commercial banks to initiate an insolvency resolution process with loan defaulters under the Insolvency and Bankruptcy Code, 2016. Second, the central bank has been empowered to form panels to advise banks on stressed assets resolution.

The government has already submitted a list of top defaulters to the Supreme Court. Combined with restructured loans, the total stressed assets of scheduled commercial banks stood at Rs 9.64 lakh crore as on December 31, 2016, as per finance ministry data.

In August 2015, a sevenpronged plan, Indradhanush, was announced to revamp the functioning of PSBs. However, many experts found the measures inadequate, and argued the state should lower its stake in the banks to less than 50 per cent as a first step towards making them more accountable. Their dual regulation by the RBI and the finance ministry also came in for criticism. The senior management at PSBs has often been reluctant to act on bad loans, fearing harassment by vigilance agencies later on. The amendments to the Banking Regulation Act protect banks, bankers and the RBI on a host of actions that would have come up for unnecessary scrutiny.

Finance minister Arun Jaitley, who had been critical of banks for not doing enough to address the bad loans situation, said the ordinance will break the logjam on bad loans. “The objective of this act is that the present status quo can’t continue... paralysis in the name of autonomy is detrimental to the economy itself,” he said. These moves, along with the reshuffle of chiefs of seven PSBs to improve their efficiency, are expected to give banks more teeth in their fight against bad loans.