Empowered RBI to deal with bad loans, to fine erring bank

The central bank can now start insolvency process in behalf of bank.

New Delhi: In an attempt to clean up the balance sheets of the banks, the Centre on Friday issued orders empowering the RBI to direct banks to initiate insolvency resolution process in case of bad assets under the provision of Insolvency and Bankruptcy Code.

Moreover, the RBI has also been given the right to form oversight committee to direct banks for resolution of bad loans.

This comes after the President signed the ordinance on Thursday night to amend the Banking Regulation Act to insert two new sections (35AA and 35AB) after section 35A in the act.

Earlier, bankers, who were part of a lending consortium, found it difficult to trigger bankruptcy proceedings.

Many times some of the bankers did not agree with others in resolution of bad loans problem fearing either writing off a part of loan or a potential witch-hunt by investigative agencies.

According to officials, now bankers will be asked to agree to the resolution agreed by majority of the consortium bankers to deal with the bad loan. Now RBI will have the power to shepherd the whole processas the Central bank will be empowered to intervene in specific cases of resolution of NPAs, to bring them to a definite conclusion in case of consortium or multiple banking arrangements.

When Mr Jaitley was asked whether this would save bankers from witch hunt, he replied, “One of the objects will also be that when bankers take commercial decision based on commercial and banking considerations they must have an adequate comfort level and therefore a committee which oversees such joint lenders’ forum arrangements is one step towards which will give them this comfort level.”

Mr Jaitley said the banks have an unacceptably high level of non-performing assets (NPAs) which hinders their capacity to fund economic activities.

“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,” said the finance minister.

Mr Jaitley said that going forward the Centre also plans to modify MoUs which banks sign at the time of receiving capital from the government.

He said that this 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.

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

( Source : Deccan Chronicle. )
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