President Pranab Mukherjee today consented to an ordinance empowering RBI for effective resolution of NPAs. The ordinance authorises the central bank to direct banks to start insolvency procedures in case of a loan default.
The ordinance that will amend the Banking Regulation Act gives RBI more teeth to act against loan defaulters. Now, the central bank can set up panels to advise banks on the best way to rid themselves of piling bad loans.
The new law is effective immediately and covers companies, partnership firms as well as individuals defaulters. Highlighting the necessity to deal with mounting stressed assets in India’s banking system the ordinance said, “...The stressed assets in the banking system have reached unacceptably high levels and urgent measures are required for their resolution”.
Bad loans in banks crimp profits, chokes credit flow and prevents lenders from lowering interest rates at a faster pace, these in turn hurt the economic growth of the country.
The Cabinet on Wednesday had approved promulgation of an ordinance to amend the Banking Regulation Act to speed up recovery of bad loans.
The move comes after clarion calls from lenders who have been jostling with stressed assets mounting to about Rs 10 lakh crore, or close to 7% of India’s GDP, as of December-end.
Of the total stressed assets in the banking system, public sector banks are saddled with non-performing assets of Rs 6 lakh crore. The remaining bad loans have been restructured by lenders.
The amendment in the banking law will enable the setting up of a committee to oversee companies that have been the biggest defaulters of loans.
The Reserve Bank of India (RBI) has provided a number of resolution tools such as corporate debt restructuring, formation of joint lenders’ forum, including rectification, restructuring and recovery, flexible structuring for long-term project loans to infrastructure and core industries (5/25 Scheme), strategic debt restructuring scheme and sustainable structuring of stressed assets (S4A) to check the menace of NPAs.
The government has been systematically going after top defaulters.