RBI modifies NPA resolution norms

The Finance Ministry Thursday swore by the changes proposed in the banking law that it said will go a long way in effectively resolving the problem of bad loans plaguing the banking sector.

The second section gives the apex bank the right to form oversight committees comprising members handpicked by the regulator to "advise banking companies on resolution of stressed assets".

Non-performing assets (NPAs) or bad loans of public sector banks (PSBs) have reached "unacceptably high levels" of over Rs 6 lakh crore, the bulk of which are in sectors such as power, steel, road infrastructure and textiles. Bankers may not always have the sectoral expertise to monetise or leverage assets underlying bad loans in the best possible way.

The ordinance is likely to be cleared by President Pranab Mukherjee on Wednesday night.

During resolution of NPAs, several issues like finding buyers and strategic partners come up, the minister had said.

The RBI already has a list of stressed assets that it is looking into and will examine more cases in the coming months, Jaitley further said that the Ordinances would also give comfort to bankers to take commercial decisions based on commercial consideration.

"The object of this Act is that the present status quo can't continue".

The first empowers the central government to order the RBI to issue directions to any bank to initiate an insolvency resolution process against a borrower who has defaulted on repayments. It will be used to amend Section 35A of the Banking Regulation Act, 1949, which regulates the ways in which the RBI can act in such cases.

It also asked the banks to ensure that their representatives in the JLF are equipped with appropriate mandates, and that decisions taken at the JLF are implemented by them.

More clarity may be required in understanding the exact role of the RBI in the resolution of the NPA issue.

When the NPA problem had just started to take the headlines, RBI had guided the sale of stressed assets move to the banks in the year 2014. Along with this, two other laws - Sarfaesi Act and DRT Act - enabled the RBI to exercise powers coupled with actions through the joint lenders' forum. Now such committees exist only for loans brought into a scheme for sustainable structuring of stressed assets, also known as S4A. "Whenever North Block has without power interfered in the banking system, it hasn't done very good", he added. The remaining bad loans have been restructured by lenders.

  • Zachary Reyes