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RBI to Direct Banks on Resolution of Stressed Assets

Banking Regulation Act, 1949, has been amended by issuance of an ordinance by the Government of India on Friday May 05, 2017; by inserting two new Sections – 35AA and 35AB, after Section 35A; that enable Union Government to authorize Reserve Bank of India (RBI) – the banking regulator, to issue directions to banking companies to initiate insolvency resolution process, under provisions of Insolvency and bankruptcy code 2016, against defaulting entities. The ordinance also empowers RBI to appoint members in the committees constituted for resolution of stressed assets. The promulgation of Banking Regulation (Amendment) Ordinance, 2017 will lead to effective resolution of stressed assets, particularly in consortium or multiple banking arrangements, as the RBI will be empowered to intervene in specific cases of resolution of non-performing assets, to bring them to a definite conclusion. As the stressed assets in the banking system have reached unacceptably high levels and urgent measures are required for their resolution.

As per Section 35AA, “The Central Government may by order authorize the 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, 2016.

As per Section 35AB, “ Without prejudice to the provisions of Section 35A, the Reserve Bank may, from time to time, issue directions to the banking companies for resolution of stressed assets. The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.”
Government is adopting a comprehensive approach for effective implementation of various schemes for expeditious resolution of stressed asset as:

  • Recent enactment of Insolvency and Bankruptcy Code (IBC), 2016 has opened up new possibilities for time bound resolution of stressed assets.
  • SARFAESI and Debt Recovery Acts have been amended to facilitate recoveries.

Stressed assets have been consistently rising owing to a combination of factors as:

  • Banks went for overambitious lending without due diligence as they extrapolated past growth & performance to the future, willing to accept higher leverage in projects, and less promoters’ equity.
  • Projections of various projects became increasingly unrealistic due to slow down in domestic demand to an economic downturn and project cost overruns escalated for stalled projects, resulting in defaults in servicing of debts.
  • Many large projects being stuck because of raw material supply and land acquisition problems due to policy paralysis.
  • There have also been cases of diversion of funds and willful defaults leading to massive pile of Distressed Assets.

The Gross NPAs of Banks increased from Rs. 1.3 trillion in March, 2012 to Rs. 6.7 trillion in September, 2016; in percentage terms Gross NPAs rose from 2.83% to 9.55% during the same period.

According to the RBI’s December Financial Stability Report, large borrowers, to whom lenders have an exposure of Rs 5 crore & above, account for 56% of bank debt and 88% of their NPAs.

This has resulted in slowdown in credit growth, especially to Indian companies. There is fear of lending to corporates. Retail loan growth is the key reason why system credit growth is holding up close to 5% levels.

The government has also reiterated that the capital infusion into the public sector banks (PSBs) will continue to be dependent on their ability to:

  • Raise capital through divestment of non-core assets
  • Closure of loss-making branches
  • Controlling costs by reducing overheads,
  • Strengthening of credit appraisal process and
  • Active NPA management.

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