Govt sees ordinance as a weapon to end banks’ paralysis over bad loans

The Centre sees the ordinance promulgated to amend the Banking Regulation Act, and specifically a provision that empowers the Reserve Bank of India to identify specific stressed assets and initiate insolvency and bankruptcy proceedings, as a ‘brahmastra’ to end the “paralysis” over bad loans.

“This will have a direct impact on effective resolution of stressed assets, particularly in consortium or multiple banking arrangements, as the RBI will be empowered to intervene in specific cases of resolution of NPAs, to bring them to a definite conclusion,” said an official statement.

The ordinance to amend Section 35(A) of the Act was signed by President Pranab Mukherjee late on Friday.

The amendment includes Sections 35(AA) and (AB) to the Act to allow the Centre to authorise the RBI to direct any bank to initiate insolvency proceedings. It also empowers the RBI to set up an Oversight Committee to advise banks on resolving stressed assets.

Briefing newspersons on Friday, Finance Minister Arun Jaitley made clear the intention underlying the amendment.

‘Not much is moving now’ “The object of the Act is that the... status quo can’t continue… and the status quo is that not much is moving,” he said. The government plans to replace the ordinance with a legislative amendment in the next session of Parliament.

More steps would be initiated in the coming months to address the issue of high non-performing assets (NPAs), he added.

With bad loans of public sector banks rising to ₹6.07 lakh crore by December-end from ₹5.02 lakh crore on March 31, 2016, rating agencies have warned of a potential banking crisis that could derail economic growth.

Jaitley also said that the Memoranda of Understanding (MoUs) signed with public sector banks for recapitalisation would have specific provisions for immediate cash relief, reduction in overheads, sale of assets, closure of non-profitable assets, and active NPA management. The RBI is looking into a list of stressed assets and will examine more cases.

Comfort for bankers Jaitley further said that the ordinances would give comfort to bankers to take decisions based on commercial considerations.

The government, along with the RBI, has been working on a roadmap to tackle stressed assets effectively for the last few weeks.

It hopes that the ordinance, along with the enactment of the Insolvency and Bankruptcy Code and amendments to the Sarfaesi and Debt Recovery Tribunal Acts, will create a comprehensive framework to tackle specific NPAs.

“Empowering the RBI with an explicit mandate should reorient various stakeholders for effective NPA resolution,” said State Bank of India Chairman Arundhati Bhattacharya. “The country and its banking system needs to move quickly and decisively to take benefits of these enabling provisions.”

Insolvency board ready to act Insolvency & Bankruptcy Board of India Chairman MS Sahoo told BusinessLine that the system is ready to handle transactions where the insolvency resolution process has been initiated by banks.

Sanjay Mehta, Leader, Risk & Advisory, BMR Advisors, said, “Banks have been scared to take decisive calls on NPAs due to fear of investigations. In addition, they lacked sectoral depth and experience to model their resolution to maximise value out of nearly dead assets. The RBI’s sector-based supervisory committees will address both the issues.”

Banks needed this last nudge, and the ordinance provides a simple but powerful push, he said.

Assocham president Sandeep Jajodia said the government had taken a “very definitive, serious and meaningful” step towards resolution of NPAs.

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