Home World Economy RBI given more powers to tackle NPAs, says Arun Jaitley

RBI given more powers to tackle NPAs, says Arun Jaitley

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NEW DELHI: Finance minister Arun Jaitley said the move to empower the Reserve Bank of India through an ordinance will break the logjam on bad loans and that banks had not been doing enough to resolve the stressed-assets situation.

“The object of this act is that the present status quo can’t continue and the present status quo is that not much was moving and therefore a paralysis in the name of autonomy is detrimental to the economy itself,” he said on Friday.

The steps prescribed by Reserve Bank will be mandatory, which in turn will expedite commercial decision-making by banks, he said.

Through the ordinance, the government has inserted Section 35 AA in the Banking Regulation Act, under which the central government may by order authorise RBI to issue directions to banking companies to initiate insolvency resolution following defaults.

When asked if the government under Section 35 AA will direct RBI to take action, the FM noted that the government had issued a general authorisation in this regard (on Friday afternoon). The finance minister said regulation of the banking system and ensuring its health are among RBI’s primary responsibilities.

“There is some list of stressed assets which I think RBI would be looking into,” he said without giving details, adding that the central bank and the government will continue to work together on a speedy resolution of the matter.

The ordinance amending the Banking Regulation Act, 1949, was notified on Friday. It empowers Reserve Bank to issue directions to banks for resolution of stressed assets.

The ordinance further authorises RBI to issue directions to any banking company or companies to initiate insolvency proceedings following a default under the Insolvency and Bankruptcy Code (IBC), 2016.

Jaitley noted that bad loan resolution is an ongoing process.

“To expedite the resolution process, IBC is an important tool,” he said. “There used to be undue delay with regard to the joint lenders’ forum (JLF), and at times due to non-agreement among banks the process of resolution was delayed.”

Experts said the government through RBI seemed to be taking the unprecedented step of getting involved in banks’ commercial decisions.

Principal economic adviser Sanjeev Sanyal said the matter had been festering for a long time, leading to the banking system getting gridlocked. “The issue is concentrated in few accounts, relatively few sectors,” he said.

“Oversight committee has been empowered by this… This is merely to ensure the process of commercial decision-making is done quickly. This is not the case of either the government or the central bank trying to resolve each case.”

“What is happening currently is resolutions are not happening and even where resolutions are taking place banks are taking a lot of time to decide to implement the decision,” said Chanda Kochhar, chief executive at ICICI Bank. “So what this does is authorises the government to empower RBI to issue a set of directions to the banks, partly those directions that are around comfort and speed of decision-making.”

Legal experts said the infrastructure needed to be put in place quickly. “This is a significant move but infrastructure of NCLT (National Company Law Tribunal) needs to be built up and the oversight committees should be formed at the earliest for faster resolution,” said Sapan Gupta, partner at law firm Shardul Amarchand Mangaldas & Co.

The finance minister observed that one of the objects of the ordinance was that bankers taking decisions on commercial and banking considerations have an adequate comfort level. “And therefore a committee which oversees such JLF arrangements is one step which will give them this comfort level,” he said in reference to the overseeing committees, adding that the proposed amendment to the Prevention of Corruption Act will also come up for consideration in both Houses of Parliament.

Jaitley dismissed the view that there would be any conflict in RBI’s new role and being the banking regulator. “It’s not a dichotomy. RBI oversees the function and therefore keeping the health of the banks intact is one of RBI’s functions,” he said.

He also appeared to take a dig at previous administrations putting pressure on banks to make unviable loans.

Jaitley said the power to issue an ordinance is a legitimate constitutional right when Parliament is not in session. “Discussions were on for the past one and a half months in this regard,” he said.

The government will also put pressure on banks to resolve stressed loans. When memoranda of understanding are signed with state-owned banks that need capitalisation, specific provisions will relate to immediate cash release initiatives, such as sale of assets, closure of non-profitable branches, and active nonperforming asset management.

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