President Pranab Mukherjee signs ordinance to amend Banking Regulation Act

President Pranab Mukherjee on Friday signed on an ordinance which empowers the Reserve Bank to effectively deal with the problem of mounting bad loans in India’s banking sector.

The ordinance amends Section 35 A of the Banking Regulation Act, which will empower the Reserve Bank to issue directions to the banks in the public interest and depositors. The amendment will allow RBI to enable banks to quickly recover non-performing assets (NPAs) from loan defaulters. 

The details of the ordinance are still not in public domain. Finance Minister Arun Jaitley has assured that the details will be shared soon. PSBs are saddled with non-performing assets or bad loans to the tune of a staggering Rs 6 lakh crore. Bad loans rose by over Rs 1 lakh crore in the first nine months of last fiscal to Rs 6.07 lakh crore by December 31, 2016.

Read | Cabinet to amend Section 35A of Banking Regulation Act to tackle NPAs

Gross NPA sof PSBs stood at Rs 5.02 lakh crore at the end of March 2016, up from Rs 2.67 lakh crore at the end of March 2015.

The amended law will also empower RBI to set up oversight panels that will shield bankers from later action by probe agencies looking into loan recasts.

Banks have been reluctant to resolve NPAs through settlement schemes or sell bad loans to asset reconstruction companies for fear of being hauled up by investigation agencies.

Once the law is amended, RBI will be able to give specific solutions for specific cases and also, if required, look at providing relaxation in terms of current guidelines, said a senior government official aware of the deliberations.

Last month, Jaitley had said NPA resolution mechanism was being worked out with the RBI which will put enough pressure on borrowers to settle dues.

“You see, the amounts are large, but the amounts are restricted. Its not that hundreds and thousands of businesses have created this problem. The problem of big NPA is confined essentially to 30-40, at best 50 companies, and therefore, those 40-50 accounts need to be resolved,” he had said.

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During resolution of NPAs, several issues like finding buyers and strategic partners come up, the minister had said.
Jaitley had gone on to say that “if you look at the whole structure, there are enough instruments available for settlements as far as the banking system is concerned. There are different legislations where action can be taken”.

According to sources, the joint lenders forum (JLF) is expected to be overhauled to facilitate quick decision making.

Instead of being a resolution mechanism, the JLF has become a delaying tool for big defaulters because as per the guidelines, restructuring needs approval of 60 per cent of consortium lenders which more often than not eludes, sources added.

As per the existing JLF guidelines, if a restructuring package is approved by 75 per cent of creditors by value and 60 per cent of creditors by number, other banks have to go along with it.

Besides, the sources said there could be provision which will make willful default a criminal offence.