RBI gets more teeth to resolve banks' NPA woes; acts quickly

New Delhi: The government today empowered RBI to ask banks to initiate insolvency proceedings to recover bad loans, amounting to over Rs 6 lakh crore in case of state- owned lenders alone, and promised more measures to resolve the NPA crisis.

Acting quickly, the RBI made substantial changes in the norms and also warned banks of monetary penalty for missing NPA resolution timelines.

Within hours of the notification on ordinance amending the Banking Resolution Act 1949, the RBI, through a notification, eased the decision making process in the Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP) under the 'Framework for Revitalising Distressed Assets in the Economy'.

Finance Minister Arun Jaitley earlier told reporters the ordinance empowers Reserve Bank to issue "directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default under the provisions of the Insolvency and Bankruptcy Code (IBC), 2016".

He said the banks have an unacceptably high level of non-performing assets (NPAs) which hinders their capacity to fund economic activities. Toxic loans of public sector banks (PSBs) rose by over Rs 1 lakh crore to Rs 6.06 lakh crore during April-December of 2016-17, the bulk of which came from power, steel, road infrastructure and textile sectors.

Gross NPA of PSBs nearly doubled to Rs 5.02 lakh crore at the end of March 2016, up from Rs 2.67 lakh crore at the end of March 2015. Jaitley further said an amendment is proposed to the prevention of corruption act which has been introduced in Parliament. The Standing Committee has submitted its report on its and will come up for consideration of both the Houses.

"Some other steps also being taken, which once decided, will be communicated," he added. Further, the government is also planning to modify MoUs which banks sign at the time of receiving capital from the government.

This, he said, would relate to immediate cash release initiatives, like sale of assets, closure of non profitable branches, reduction of overheads, business turnaround steps, and strengthening of credit appraisal process.

Emphasising that ordinance has been notified as of today morning, the Finance Minister said, discussions were on for last one and a half months with regard to NPA resolution policy.

The government has issued a general authorisation to RBI in this regard in line with the ordinance promulgated by President Pranab Mukherjee last last evening. The ordinance, which amends Section 35A of the Banking Regulation Act 1949, will have to be placed in Parliament for approval in the upcoming monsoon session. It has inserted Section 35 AA and Section 35 AB in the Act.

"The object of this Act is that the present status quo cannot 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 and therefore that really requires to be broken," Jaitley said.

He said the move will expedite commercial decision making of the banks. The minister said one of the objects is that "when bankers take commercial decisions on commercial and banking considerations, they must have adequate comfort level". Jaitley further said that interference of the Finance Ministry has not helped in dealing with the problem of the sector.

"Whenever North Block has without power interfered in the banking system, it hasn't done very good," he said.

The ordinance has also empowered the RBI to set up sector related oversight panels that will shield bankers from later action by probe agencies looking into loan recasts.

"And therefore a committee which oversees such JLF (joint lenders forum) arrangements is one step which will give them (bankers) this comfort level," Jaitley said.

He further said an amendment is proposed to the prevention of corruption act which has been introduced in Parliament. The Standing Committee has submitted its report on its and will come up for consideration of both the Houses.

"Some other steps also being taken, which once decided, will be communicated," he added.

Further, the government is also planning to modify MoUs which banks sign at the time of receiving capital from the government.

This, he said, would relate to immediate cash release initiatives, like sale of assets, closure of non profitable branches, reduction of overheads, business turnaround steps, and strengthening of credit appraisal process.

Meanwhile, in a major restructuring in PSU banking space, the government today appointed heads of various public sector banks including rejig at PNB and Bank of India.