NPA ordinance gets president's approval; RBI gets more powers to tackle bank bad loans

President Pranab Mukherjee has approved the promulgation of the ordinance giving greater powers to Reserve Bank of India to tackle mounting bad loans in the banking sector.

The Cabinet had on Wednesday approved the promulgation of an ordinance to amend the Banking Regulation Act for resolution of the non-performing asset (NPA) crisis.

The amendments to the Act is expected to help effectively resolve the lingering bad loans problem.

The ordinance, signed by President Pranab Mukherjee on Friday, has a provision under which the central government may authorise the Reserve Bank of India to issue directions to any banking company to initiate insolvency in respect of a default under the provision of the Insolvency and Bankruptcy Code. 2016.

 NPA ordinance gets presidents approval; RBI gets more powers to tackle bank bad loans


It also has provisions to empowering the RBI to issue directions to banking companies for resolution of stressed assets.

The RBI may specify one or more authorities or committees to which it will appoint members to advice banks on resolution of stressed assets.

The ordinance says that the stressed assets in the banking system has reached unacceptably high levels and urgent measures were required for their resolutions.

The ordinance refers to Insolvency and Bankruptcy Code which was enacted to consolidate and amend laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets and said its provisions can be effectively used to address problems of non-performing assets by empowering the banking regulator to issue directions in specific cases.

The ordinance was sent to the President after it was cleared by the Union Cabinet on Wednesday.

"This ordinance will enhance the power of RBI to manage bad loans," Minister of State for Finance Santosh Kumar Gangwar said.

Finance minister Arun Jaitley is scheduled to hold a pres conference later today to give out the details of the ordinance.

On Thursday, the Cabinet's decision got a thumbs-up from the market as the Bank Nifty rallied 1.85 percent to close at 22,720.10.

"Banks are in a sweet spot due to a new framework to deal with NPAs and better quarterly results," said Vinod Nair, Head of Research, Geojit Financial Services, was quoted as saying in a PTI report.

Earlier media reports said Section 35 A of the Banking Regulation Act was to be amended through the ordinance route, empowering the RBI to issue direction to banks to recover non-performing assets (NPAs) from loan defaulters.

The amendments to Section 35A empowers the Reserve Bank to issue directions to the banks in the public interest and depositors.

PSBs are saddled with non-performing assets or bad loans to the tune of a staggering Rs 6 lakh crore.

Bad loans rose by over Rs 1 lakh crore in the first nine months of last fiscal to Rs 6.07 lakh crore by 31 December 2016.

Gross NPA of PSBs stood at Rs 5.02 lakh crore at the end of March 2016, up from Rs 2.67 lakh crore at the end of March 2015.

The amended law will also empower the RBI to set up oversight panels that will shield bankers from any probe by agencies looking into loan recasts.

Banks have been reluctant to resolve NPAs through settlement schemes or sell bad loans to asset reconstruction companies for fear of being hauled up by investigation agencies.

Once the law is amended, the central bank will be able to give specific solutions for specific cases and also, if required, look at providing relaxation in terms of current guidelines, said a senior government official aware of the deliberations.

Finance Secretary Ashok Lavasa had on Thursday said that with the ordinance "we should be able to reach resolution in many of the cases" on the back of professionalism in the banking system and participation of promoters themselves.

He exuded confidence that the amendments will allow regulator Reserve Bank and lenders to take effective steps to deal with the toxic assets.

After discussions with stakeholders, the government felt that some changes were necessary in the statute book to take the NPA problem head-on.

He is of the view that there is enough appetite in the market to buy stressed assets.

"We should not judge the capacity that is there in the market because people do have appetite for investment in the Indian market. India is probably one of the best destinations for investment at this point of time," he asserted.

With PTI and IANS inputs

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Updated Date: May 05, 2017 14:57:28 IST