Government gives more power to RBI to identify bad loans and tackle them

Economic Affairs Types of Banks and Banking

The Union Cabinet approved the promulgation of an ordinance to amend the Banking Regulation Act, preparing ground to take tough action against chronic bank loan defaulters.

Key measures proposed in the ordinance:

The government authorise the Reserve Bank of India (RBI) to issue directions to banks to initiate insolvency proceedings against defaulters under the bankruptcy code.
RBI on its own accord can issue directions to banks for resolution of stressed assets.
RBI can form committees with members it can choose to appoint to advise banks on resolution of stressed assets.

Analysis:

NPAs have been rising in the banking sector despite the government taking a series of measures in recent months. Scheduled commercial banks’ total stressed assets, which comprise gross NPAs as well as restructured standard advances, stood at Rs 9.64 lakh crore as on December 31, 2016, as per finance ministry data. Bad debts have risen sharply in state-owned banks while private banks have registered a relatively lower spike in NPAs in the fiscal year.
Public sector banks’ NPAs surged by over Rs 1 lakh crore during the April-December period of 2016-17. PSU banks’ gross NPAs in the first nine months of the current fiscal rose to Rs 6.06 lakh crore by December 31, 2016, from Rs 5.02 lakh crore during 2015-16. For private sector banks, gross NPAs grew to Rs 70,321 crore by December 31, 2016, from Rs 48,380 crore as on March 31, 2016
The new law will also likely legally ring-fence bankers from scrutiny from investigating agencies, which many bankers say often restrict lenders to get after chronic defaulters.
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.
Besides, banks that were part of a consortium found it difficult to trigger bankruptcy proceedings. This ordinance attempts to solve that problem.

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