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Govt gives wide-ranging powers to RBI to tackle bad loans problem

08 May 2017 Evaluate

In a bid to tackle the big bad loans problem, the government has given wide- ranging legislative powers to the Reserve Bank of India (RBI) to issue directions to lenders to initiate insolvency proceedings. Non-performing assets (NPAs) or bad loans of public sector banks (PSBs) have reached unacceptably high levels of over Rs 6 lakh crore, the bulk of which are in sectors such as power, steel, road infrastructure and textiles.

The much-awaited Ordinance to amend the Banking Regulation Act which got promulgated by President Pranab Mukherjee authorises the ‘RBI 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’. It has also empowered RBI to issue directions to banks for resolution of stressed assets.

As per the Ordinance, RBI has been given powers to specify one or more authorities or committees to advise banking companies on a resolution of stressed assets. The law will also empower RBI to set up sector related oversight panels that will shield bankers from later action by probe agencies looking into loan recasts. Banks have been reluctant to resolve NPAs through settlement schemes or sell bad loans with hair cut to asset reconstruction companies for fear of 3Cs -- CBI, CAG and CVC.

With the enactment of amendment, RBI will be able to give specific solutions with regard to hair cut for specific cases and also, if required, look at providing relaxation in terms of current guidelines. Besides, the Ordinance will ensure effective use of IBC 2016 for resolution of stressed assets and give a big boost to the government's efforts to cut down NPAs in the banking sector. The ordinance, which amends Section 35A of the Banking Regulation Act 1949, will be placed in Parliament for approval in the upcoming monsoon session. It has inserted Section 35AA and Section 35 AB in the Act.

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