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Business News/ Industry / Banking/  3 ways in which changes to Banking Act gives RBI more powers tackle NPAs
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3 ways in which changes to Banking Act gives RBI more powers tackle NPAs

Government notified the Banking Regulations Amendment Ordinance to give RBI more powers to tackle NPAs clogging Indian banks

The govt may authorise RBI to issue directions to banks to initiate insolvency proceedings against defaulters under the bankruptcy code. Photo: MintPremium
The govt may authorise RBI to issue directions to banks to initiate insolvency proceedings against defaulters under the bankruptcy code. Photo: Mint

Mumbai: The Union government notified the Banking Regulations Amendment Ordinance on Friday as it tries to accelerate resolution of the Rs9.64 trillion of non-performing assets (NPAs), or bad loans, clogging the Indian banking system.

Here are the three key measures proposed in the ordinance:

1) The government may authorise the Reserve Bank of India (RBI) to issue directions to banks to initiate insolvency proceedings against defaulters under the bankruptcy code.

2) RBI on its own accord can issue directions to banks for resolution of stressed assets.

3) RBI may form committees with members it can choose to appoint to advise banks on resolution of stressed assets.

Also Read: President Mukherjee approves ordinance to amend Banking Regulation Act

These measures, in effect, give the RBI and the central government powers to act directly against any company which has defaulted on its loans.

“It is a broad remit to the central bank to resolve stressed assets," said Abizer Diwanji, partner and financial services leader at consultancy firm EY.

“Earlier banks couldn’t invoke the insolvency and bankruptcy code due to fear of being questioned. Now with RBI directing banks to initiate insolvency this will be a transparent and market-determined approach," he added.

Besides, banks that were part of a consortium found it difficult to trigger bankruptcy proceedings. This ordinance attempts to solve that problem.

The insolvency and bankruptcy code is a time-bound process and seeks to reduce the time for resolving a default case to less than a year as against the average time taken of more than four years currently.

“The objective is to give a stamp of approval of the regulator, so that the decision of banks will not be questioned," said M.R. Umarji, former chief legal advisor of the Indian Banking Association.

Umarji, like many others, believes that this ordinance leads to a conflict of interest for RBI. He added, however, that there is a precedent.

“To a certain extent there is a conflict of interest. But it will be a different role of the RBI. It doesn’t stop RBI from correcting whatever wrong that is happening in banks," he said.

Earlier, there used to be a system called credit authorisation scheme. Any loan beyond a limit required the RBI’s authorisation. If RBI had the power to decide how much banks could lend to a certain borrower, then it could definitely look at resolution package, he added.

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Published: 05 May 2017, 01:22 PM IST
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