Onus on RBI as govt notifies new rules to tackle NPAs of banks

The government on Friday notified an ordinance to the Banking Regulation Act, giving the Reserve Bank of India (RBI) broad powers to deal with specific bad loans cases as it tries to speed up resolution of Rs9.64 trillion of non-performing assets clogging the Indian banking system.

Experts cautioned that this was just the first step in the process of putting the onus on the central bank to reduce the mountain of bad loans. The move could pose potential conflict-of-interest issues for the regulator, they said.

The ordinance, which was approved by President Pranab Mukherjee late on Thursday, also gives the government powers to authorize RBI to invoke the Insolvency and Bankruptcy Code against defaulters.

Separately, it also empowered the central bank to direct banks on its own to settle bad loans with defaulters, and to form oversight committees to deal with the issue.

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The new rules are applicable with immediate effect and the centre has already issued a “general instruction” to RBI to take action, finance minister Arun Jaitley said.

The central bank plans to set up a secretariat to oversee the resolution process for the biggest defaults, Bloomberg reported, citing a person it didn’t identify.

“When bankers take commercial decisions, they must have adequate comfort level,” said Jaitley, explaining the reasoning behind the oversight panels.

He brushed aside conflict-of-interest concerns for RBI, saying the move will expedite commercial decisions. “Paralysis in the name of autonomy needs to be broken,” said Jaitley.

Some experts say that giving more powers to the central bank to take what can be seen as commercial decisions could lead to a conflict of interest for RBI. Typically, regulators are at arm’s length from the commercial decisions of entities they regulate in order to preserve systemic stability.

“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 is happening in banks,” said M.R. Umarji, former chief legal advisor of the Indian Banks’ Association.

Stressed asset resolution has stalled, especially after the Central Bureau of Investigation (CBI) arrested former bankers of IDBI Bank Ltd over a Rs950 crore loan given to Kingfisher Airlines.

“There was a proposed amendment to Prevention of Corruption Act introduced in Parliament. Standing committee has already considered it and submitted its report,” said Jaitley.

The new set of rules comes after previous efforts by the central bank, such as the strategic debt restructuring scheme and the so-called sustainable structuring of stressed assets (S4A), didn’t find many takers, owing to their rigid framework.

“Earlier, banks couldn’t invoke the insolvency and bankruptcy code due to fear of being questioned. Now, with RBI directing banks to initiate insolvency (proceedings), this will be a transparent and market-determined approach,” said Abizer Diwanji, partner and financial services leader at consulting firm EY.

However, other experts pointed out that while RBI has got enabling powers, errant borrowers still have the means to stall resolution.

The amendment “is a progressive step and gives huge enabling powers to RBI. However, the position vis-à-vis other statutes doesn’t change,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services Llp . “The mechanism RBI forms will still be constrained by the provisions of other statutes—whether it be the Corruption Act, Companies Act or Contract Act. So, the window for borrower to dispute a resolution is still there with of course the exception of the IBC (Insolvency and Bankruptcy Code).”

There are also fears about whether pushing through resolution in a hurried timeline will lead to a crash in asset prices. While there is significant money waiting on the sidelines to buy stressed assets, deals have been few and far between due to disagreements on valuation.

“So now the government can direct RBI to have a bank sit down and resolve a specific stressed asset. But what next?” asked Anurag Das, managing partner of Rain Tree Capital, a Singapore-based investment manager specializing in distressed and special situations. “The key to a fair price is attracting enough participants. So how do we get real participants to assess and bid in the IBC timeline?”

A regulator deciding in which case insolvency should be filed poses many challenges, said Sumant Batra,insolvency expert and managing partner of law firm Kesar Dass B. & Associates.

“A lender or borrower are in best position to decide whether to commence insolvency or not. RBI will need to appoint experts to scrutinize each case as it cannot be an administrative decision. The best way to encourage banks to resolve stressed assets under the bankruptcy code is to offer them some incentives to file (for) insolvency,” said Batra.