President Mukherjee approves ordinance to amend Banking Regulation Act

Mumbai: President Pranab Mukherjee on Friday approved the ordinance to amend the Banking Regulation Act 1949, giving more powers to the Reserve Bank of India (RBI) to deal with non-performing assets, according to multiple news channels.

This comes after the Union cabinet on Wednesday approved the proposal to amend Section 35 of the BR Act and sent the ordinance for the President’s approval.

The stressed loans resolution package prepared by the government will empower the central bank to directly intervene in settling bad loan cases.

The central bank can effectively ask banks to sit down with defaulters and reach a settlement as part of the package, aimed at accelerating a resolution of the Rs9.64 trillion in bad loans choking the banking system. The NPA problem is, to a large extent, confined to 50 large loan defaulters.

“Banks presently have various powers under Banking Laws, SARFAESI Act, and now the bankruptcy law to enforce lenders rights concerning NPAs. However, banks have obvious incentive problems to exercise those powers including balance sheet implications. It is expected that the ordinance would empower the RBI to nudge the banks to take necessary steps towards resolution of NPAs,” said Bhavin Shah, partner, Financial Services Tax Leader, PwC.

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This will involve amending Section 35 of the Banking Regulation Act, which currently deals with powers of inspection for RBI. The cabinet approved an amendment and sent an ordinance to President Mukherjee for his approval, finance minister Arun Jaitley told reporters on Wednesday without giving details.

RBI will create a timeline of, say, 6-9 months for banks to deal with their big bad-loan accounts.

The scheme will kick off with banks being told to resolve the top 40-50 cases, said two people on the condition of anonymity.

If banks aren’t able to find a solution to the problem by the specified time, the central bank will step in directly, said one of the people. This person said RBI will also get some punitive powers to ensure that banks act quickly on these bad loans.

Banks and investors perceive an implicit guarantee on the part of the government and think it will bear the cost of defaults and losses. This scheme will try to correct that perception, said the first person.

RBI will likely exercise control through oversight committees which will have representation from the central bank and help bankers overcome concerns about their decisions being probed by vigilance agencies, said the second person.

Currently, under the so-called Scheme for Sustainable Structuring of Stressed Assets (S4A), there is a provision for an oversight committee consisting of “eminent persons” recommended by the Indian Banks’ Association in consultation with RBI.

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One of the functions of the panel under the new framework will be to ensure that the so-called joint lenders’ forums are more comfortable with taking decisions and speeding them up.

“If the regulator can come up with regulations suited to different sectors, unlike the past approach of one-size-fits-all, that would be a good thing,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp. “If the ordinance has something on protecting bankers from fear of investigation, that would be an interesting thing.”

While there will likely be nothing in terms of an explicit protection to bankers from vigilance authorities, the new framework will “raise the bar for questioning business decisions”, said the first person.

Protection of commercial decisions from vigilance inquiries has been a key demand from bankers, especially after the Central Bureau of Investigation arrested former officials of IDBI Bank Ltd, including a former chairman, for sanctioning loans worth Rs950 crore to Kingfisher Airlines Ltd.

This fear has prevented lenders from sacrificing a part of the amount due to them and pushing through sales of stressed assets to turnaround specialists and private equity firms.