The Reserve Bank of India (RBI) now has the powers to direct banks to initiate bankruptcy proceedings against defaulting companies, and to take decisions on behalf of lenders while dealing with stressed assets, after the President gave his assent to an Ordinance to amend the Banking Regulation Act.
The Ordinance is the focal point of a new framework which the government hopes will help it hasten the processes to deal with nearly Rs 7 lakh crore worth of non-performing assets (NPAs) in the Indian banking system. The government on Friday notified the Banking Regulation (Amendment) Ordinance 2017. The Ordinance comes into force immediately and enables the RBI to direct banks to initiate bankruptcy proceedings against defaulting companies under the Insolvency and Bankruptcy Code. The banking regulator has also been empowered to decide on dealing with toxic assets and instructing banks to act accordingly. The RBI will also set up oversight committees to direct banks and joint lenders’ forums to deal with the stressed assets.
“The Ordinance has just received the President’s assent. I am sure it will be a very interesting piece of legislation,” said Sudarshan Sen, executive director, RBI. “We will make all efforts to resolve the NPA problem. We are making efforts and we will continue to do so...But this is a continuing process, nothing happens overnight. These are difficult problems, but we are determined to solve them,” Sen added.
Bankers say the country has now the right environment for such resolution proceedings to succeed. The amendments to the Banking Regulation Act, enactment of the Insolvency and Bankruptcy Code, and amendments to the Sarfaesi and Debt Recovery Tribunal Acts “indicate the government’s firm commitment to find a satisfactory solution to the NPA resolution problem,” said Arundhati Bhattacharya, chairman of State Bank of India.
“Empowering the RBI with an explicit mandate should reorient various stakeholders for effective NPA resolution. The country and its banking system needs to move quickly and decisively to take benefits of these enabling provisions,” Bhattacharya said.
Chanda Kochhar, managing director and CEO of the country’s largest private sector lender ICICI Bank Ltd, said the amendments will kickstart the resolution process, and once a company gets into a defined resolution path, then it becomes easy for the banking system to come to a conclusion.
“It is not a matter of coming up with more tools. What is required is to expand the jurisdiction of the oversight committees and empower these committees to take tough decisions. Once a decision is taken, it is important that all banks in the consortium should stick to that decision and strive to resolve the process in a time-bound manner,” said Kochhar.
Kochhar, though, stressed that the intention is not always taking over the entire assets after all.
“Resolution will have to be a different type for different cases. Not necessarily in every case an entire company has to be sold. Non-core assets can be sold to bring liquidity, it can also mean just restructuring of existing loan itself,” Kochhar said.
Even when there are buyers, timely action might not come from all consortium members, derailing the process, she said.
As on December, 38 listed banks had gross bad debt of Rs 6.96 lakh crore. Add restructured assets of at least Rs 2.5 lakh crore, the total bad assets cross Rs 9.5 lakh crore. Some observers also say the total stressed assets in the system could be at least Rs 12 lakh crore. About 40 per cent of the total stressed and bad assets belong to top 40-50 accounts, bankers say. Industry leaders also agree there is a need for a resolution process, and some tough stance is needed. But the RBI should not deal directly with industrialists and let the bank do the job, instead.
“India Inc’s balance sheet needs to be cleaned up. Banks gave money indiscriminately to various industrialists without checking in details if these projects were viable,” said AM Naik, group executive chairman of Larsen & Toubro. “More powers with the RBI, as long as the central bank does not misuse it, or intervenes directly with the industrialists, is welcome. The RBI should push more banks to make sure that NPAs are reduced and more money is recovered,” said Naik.
“The Ordinance breaks the logjam where each stakeholder was expecting others to take initiative. With this amendment, onus is on the RBI to initiate the resolution process. And, if it is seen dithering on taking action, it will have a lot of answering to do,” said R Gandhi, who retired as RBI deputy governor last month.
Two sections defining these powers have been inserted after Section 35A in the Banking Regulations Act.
“The RBI required to be empowered in relation to specific stressed assets. It was doubtful that whether the language of Section 35A covered this empowerment. Therefore, it was felt necessary that the RBI should be empowered in this direction,” Finance Minister Arun Jaitley said at a media briefing on Friday.
Jaitley said the Ordinance was signed late last night by President Pranab Mukherjee and that added Sections 35AA and 35AB. “The first part relates to the government of India authorising the RBI to initiate insolvency and bankruptcy proceedings in relation to any stressed asset. And the second part relates to specific directions of formation of committees and oversight committees,” he said.
When asked about concerns that the government would now essentially interfere in banks’ business decisions, Jaitley said: “It's not a dichotomy. The RBI oversees their functioning and therefore keeping the health of banks intact is one of the RBI's functions.” He said the RBI was already drawing up a list of stressed assets which required to be looked into. The aim is to monitor progress on the top 35-40 toxic assets which constitute 60 per cent of all NPAs by value.
“The object of this Act is that the status quo cannot continue. Not much was moving. paralysis in the name of autonomy is detrimental to the economy itself and therefore that really requires to be broken,” he said.
“There is a potential here that the oversight committee can use its powers to do three things. One is stop ‘free-riding’ by lenders who did not participate. Two, compliance after an agreement has been come to. And three, once the OC has put a stamp on a certain resolution, it will then be able to get rid of the old problem, which is that bankers were afraid that they might be investigated later,” said the finance ministry’s Principal Economic Advisor Sanjeev Sanyal.
The timeline and process of bankruptcy of companies with stressed assets will be according to the Insolvency and Bankruptcy Code. Jaitley said that the Prevention of Corruption Act would also be amended to exempt commercial decisions by public sector banks from scrutiny by investigating agencies.
As has been reported earlier, state-owned banks will also conduct open auctions of NPAs, wherein cash-rich public sector companies will be encouraged to buy such assets in their sector. There may be a set of fresh guidelines for public auctions of assets by state-owned banks for the steel and power sector.
When asked on the matter, Financial Services Secretary Anjuly Chib Duggal said any decision by PSUs to buy stressed assets would take place without the interference of the central government.
“This is indeed a great move to empower the RBI to implement solutions to address the NPA issue rather than just announce policies. We hope that this Ordinance will lend the necessary teeth to unwind NPAs in a time-bound manner through empowered administrative mechanisms,” said Sanjay Mehta, leader, risk and advisory, BMR Advisors.
(With inputs from Amritha Pillay)