Govt gives more power to RBI to identify bad loans and tackle them
The Reserve Bank of India will now have the power to declare companies and individuals defaulters and ask banks to take action. The government on Friday formally issued an executive order giving the central bank greater power to tackle growing bad loans that are stifling banks and affecting the flow of credit.Updated: May 05, 2017 18:44 IST
The Reserve Bank of India will now have the power to declare companies and individuals defaulters and ask banks to take action.
The government on Friday formally issued an executive order giving the central bank greater power to tackle growing bad loans that are stifling banks and affecting the flow of credit.
The central bank will now have powers to appoint committees to advice banks on ways to resolve the issue of stressed assets or by initiating insolvency procedures against defaulters.
“The main object of this Act is that the present status quo can’t continue,” said finance minister Arun Jaitley, after the ordinance was notified.
There has been growing dissent among bankers that their commercial decisions against stressed assets and account have been questioned by authorities, especially after the CBI crackdown on IDBI for loans to the now defunct Kingfisher Airlines.
“The oversight committee will ensure that bankers get a comfort level when they take commercial decisions,” said Jaitley.
This ordinance was promulgated by President Pranab Mukherjee last night and notified on Friday.
Sale of assets, closure of non-profitable branches, reduction of overhead and business turnaround initiatives will be part of resolution process, are some of the measures that the RBI will be authorised to take against defaulters, explained Jaitley.
Non-performing assets or NPAs of banks have risen to about 17% of total loans, the highest level among major economies. This NPA problem is largely confined to 50 loan defaulters in India. And the ordinance looking at resolving this issue will amend section 35 of the Banking Regulation Act.
“Action against top 50 defaulters have already been started,” financial services secretary, Anjuli Chib Guggal said.
In comparison to the private sector, the bad loans number in public sector banks (PSBs) have risen sharply. The bad loan of public sector banks jumped by over Rs 1 lakh crore during the April-December period of 2016-17. The gross NPAs of PSU banks’ in the first nine months of the current fiscal increased 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 rose to Rs 70,321 crore by December 31, 2016, from Rs 48,380 crore as on March 31, 2016.
Arundhati Bhattacharya, chairman of the country’s largest public sector lender SBI, said: “Empowering the RBI with an explicit mandate should reorient various stakeholders for effective NPA resolution. The country and its banking system need to move quickly and decisively to take benefits of these enabling provisions.”
The Union cabinet on Wednesday had approved promulgation of an Ordinance to amend banking laws 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 9.64 lakh crore, or 8.4% of the GDP, according to Credit Suisse. 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 NPAs have increased over the years due to economic slowdown as also because of wilful defaults by companies.
RBI has provided a number of resolution tools such as Corporate Debt Restructuring (CDR), Formation of Joint Lenders’ Forum (JLF) including rectification, restructuring and recovery, Flexible Structuring for long term project loans to Infrastructure and Core industries (5/25 Scheme), Strategic Debt Restructuring Scheme (SDR) and Sustainable Structuring of Stressed Assets (S4A) to check the menace of NPAs.