Armed with NPA ordinance, RBI gets teeth to battle bad loans
President Pranab Mukherjee promulgated an ordinance authorising the Reserve Bank of India (RBI) to issue directions to banks to initiate insolvency resolution process in the case of loan default.
This will provide a big boost to the government's efforts to tackle mounting bad loans, reports PTI. Also, this will allow RBI to select some large non-performing accounts on the books of banks and work to resolve them in a time-bound manner, through the powers it gets from the Banking Regulation (Amendment) Ordinance, a senior banking industry source told Cogencis. "Under the empowerment that RBI gets from the ordinance, RBI will be laying out a very clear structure for the resolution that they have in mind," the source said. "They will identify a set of cases that will initially be put through the structure with a very clear timeframe."
The ordinance has been issued in light of the urgency to deal with the toxic loans that have crossed the Rs 6 lakh crore mark.
Additionally, the RBI will be in a position to use its existing toolkit of 5:25 refinance scheme, Strategic Debt Restructuring, Scheme for Sustainable Structuring of Stressed Assets and other schemes, and even make modifications to them to address any specific issues, the source said.
The law will also empower RBI to set up sector related oversight panels that will shield bankers from later action by probe agencies looking into loan recasts, reports PTI. Banks have been reluctant to resolve NPAs through settlement schemes or sell bad loans with hair cut to asset reconstruction companies for fear of 3Cs –CBI, CAG and CVC. With the enactment of amendment, RBI will be able to give specific solutions with regard to hair cut for specific cases and also, if required, look at providing relaxation in terms of current guidelines. Finance Minister Arun Jaitley had in March said that the government would consider setting up multiple oversight committees under the RBI to examine the cases of NPAs referred by banks. "The RBI has made an Oversight Committee to look into the process of cases referred to it by the different banks," he had said.
The ordinance, which
amends Section 35A of the Banking Regulation Act 1949, will have to be placed in Parliament for approval in the upcoming monsoon session. It has inserted Section 35AA and Section 35 AB in the Act. The government
had earlier enacted the IBC to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner.