Mumbai: The stressed loans resolution package being prepared by the government will empower the Reserve Bank of India (RBI) to directly intervene in settling bad loan cases, said people aware of the matter. The central bank can effectively ask banks to sit down with defaulters and quickly sort out the Rs9.64 trillion bad loan mess. The Non Performing Assets (NPA) problem in the banking system is to a large extent confined to 50 large loan defaulters.
This will involve amending Section 35 of the Banking Regulation Act, which currently deals with powers of inspection for the RBI. The cabinet has approved an amendment and an ordinance has been sent to the President for his approval, finance minister Arun Jaitley briefed reporters on Wednesday without giving details. The government may announce this package as early as Thursday, officials said.
A second measure is likely to be the formation of oversight committees which will have representation from the central bank and help bankers overcome concerns of their decisions being probed by vigilance agencies. Currently, under the Scheme for Sustainable Structuring of Stressed Assets (S4A), there is a provision for an oversight committee consisting of “eminent persons” recommended by the Indian Banking Association in consultation with RBI. But S4A hasn’t taken off due to the rigidity of this structure.
While RBI’s involvement may well speed up the resolution process, it also raises questions of conflict of interest. Typically, regulators are at an arm’s length from the commercial decisions of the entities they regulate in order to preserve systemic stability.
Also, RBI employees are governed by the same rules of engagement as other public sector employees, pointed out an analyst, who did not wish to be named. Unless there is a change in the Prevention of Corruption Act—another measure which bankers are widely pushing for—it is not clear how empowering RBI would make a difference, this person said.
Protection from vigilance inquiries of commercial decision has been a key demand from bankers especially after the Central Bureau of Investigation arrested former officials of IDBI Bank, including a former chairman, for sanctioning loans worth Rs950 crore to Kingfisher Airlines. This fear has prevented lenders from taking haircuts on loans and push through sales of stressed assets to turnaround specialists and private equity firms.
Bankers have also asked for other measures which will give them more comfort such as allowing amortisation of loan losses and structuring repayments over a longer time period. It is not clear yet whether these will be part of the resolution framework.