RBI to issue directions to any banking company to initiate insolvency resolution process in respect of a default.
New Delhi: The Narendra Modi-led government on Friday notified the ordinance to amend the Banking Regulation Act, empowering the Reserve Bank of India (RBI) and banks to initiate bankruptcy proceedings against chronic defaulters.
As per the government's notification, the Central Bank may order authorization to the RBI to issue directions to any banking company to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.
Earlier on Wednesday, the Union Cabinet approved an ordinance allowing RBI to deal with bad loans on a case-to-case basis as opposed to following a set of broad guidelines and rules for all non-performing assets ( NPAs).
"The RBI may specify one or more authorities or committees to advise banking companies on a resolution of stressed assets," added the notification.
The RBI and the government had also asked banks to impose a strict ban on any new loans to willful defaulters. Such borrowers are also now barred from being appointed as directors on boards of companies.
The new law may also thus empower banks to force lingering corporate loan defaulters to forego ownership and voting rights in their companies, allowing lenders to induct new management leadership mandated to turnaround these entities within a specified time frame.
The fresh set of rules may also allow banks to separate the outstanding unpaid debt into sustainable and unsustainable parts to better restructure loans.