By Ibu Sanjeeb Garg
The recently announced Banking Regulation Amendment Bill (Ordinance) has taken forward the fight to combat bad loans. In the last two years the problems of NPA or Non Performing Assets has badly affected the capacity of banking institutions especially public sector banks. A large part of the public sector banks have classified a large part of its loans as non-performing assets or difficult to recover. With such assets threatening to damage the balance sheet of the banks the government had to take notice of the problem. In the past two years a number of measures have been announced to combat the same and the recently announced Bill is an extension of the fight.
The Ordinance amends the Banking Regulation Act, 1949 to insert provisions for recovery of outstanding loans. Under these provisions the central government would have the power to authorize the Reserve Bank of India to direct banks to initiate recovery proceedings against loan defaulters. This will make RBI a direct stakeholder towards resolving the issues of stressed assets.
Non-performing assets (NPAs) are loans given by banks, where the borrower defaults on repayment. According to the Reserve Bank of India, loans are classified as NPAs 90 days after default. Over the last decade, NPAs as a proportion of total loans extended by banks have increased from 2.3% in 2008 to 7.5% in 2016 (Rs 6.11lakh crore or 4.5% of GDP).At these levels, India’s NPAs are higher than other emerging markets. A rise in NPAs adversely affects the lending capacity of banks, thereby impacting credit availability, investment and economic growth.
These recovery proceedings will be under the Insolvency and Bankruptcy Code, 2016.The Code provides for a time bound process to resolve defaults by either restructuring the loan e.g restructuring the loan repayment schedule of liquidating the defaulter’s assets. The Bill also empowers the RBI to issue directions to banks from time to time for resolving stressed assets. The RBI may specify authorities or committees to advise banks on resolving stressed assets. Members on these committees will be appointed or approved by the RBI.
Banks may also take legal action by approaching Debt Recovery Tribunals, by taking possession of the collateral (SARFAESI Act) or taking action under the Insolvency and Bankruptcy Code, 2016. In case banks cannot recover a part of the loan, the unrecovered amount will have to be written off as a loss
Currently, the RBI may issue directions to banks on grounds such as ‘public interest’ and ‘in the interest of banking policy’. The Bill gives RBI additional powers to direct banks to initiate recovery proceedings under the Insolvency and Bankruptcy Code, 2016.This will undoubtedly augment the existing powers of RBI are sufficient which makes this Ordinance towards the issue of solving stressed assets.
As the banking regulator and the central bank, the RBI is responsible for maintaining financial stability, while banks have the flexibility to make business decisions. This Bill puts that relationship in a new paradigm which needs to be redrawn to accommodate in the light of changing concerns. The idea to make RBI a part of the stressed assets process would bring much more transparency in the process. While RBI would not interfere in the day to day working of Banks it would undoubtedly seek greater compatibility from banks in question of assets which become stressed over a period of time. Currently, banks face certain challenges as part of recovery proceedings such as the lack of incentives among public sector bankers to recognize losses, the fear of investigation in case of low recoveries and third and most important issues of insufficient capital to absorb losses. The Ordinance undoubtedly positions itself in a unique place to be able to nudge banks on all three actions with the intervention of the central bank. Also by limiting the role of central bank only to the question of stressed assets the Bill does not seek to restrict the independence of banks.
While detractors argue that the power given within this Bill may harm the independence of the banks yet the RBI to issue directions to banks for recovery of loans may be justified on grounds that NPAs impact economic stability. A rising trend in loan defaults affects the lending capacity of banks, investment potential in the country and may have wider economic implications. In this situation the role of greater intervention of RBI is required to resolve the situation and recover the outstanding amount. Thus this Bill would undoubtedly give an impetus towards combating the problem of rising NPA’s in the country.
( Views expressed by the author are personal)