The government on Friday promulgated an ordinance empowering the RBI in a big way to deal with the crisis of huge bad loans of banks to break the "paralysis" that prevails in the name of autonomy by initiating insolvency process against defaulters and formation of oversight committees.
The government has also issued a separate order authorising the RBI to exercise jurisdiction under Section 35AA under the ordinance that aims at tackling the mounting bad loans estimated at over Rs 6 lakh crore in the case of public sector banks.
Briefing media on the features of the ordinance, Finance Minister Arun Jaitley said that a number of steps will be taken to revitalise public sector banks, including those relating to sale of assets, closure of non-profitable branches and reduction of overheads when MoUs are signed with them when they seek recapitalisation.
The ordinance was notified this morning after President Pranab Mukherjee signed the executive order late last night on the recommendation sent by the Cabinet on Wednesday night.
Declining to go into details of the big defaulters or the timeline to recover the bad debts, Jaitley said there is a list of stressed assets which Reserve Bank of India (RBI) would be looking at.
"Paralysis in the name of autonomy is detrimental to the economy. One of the objectives behind issuing the ordinance is that the present status quo cannot continue. The present status quo is that nothing is moving. Therefore there is paralysis in the name of autonomy and that should be broken," he said.
He said one of the objectives would also be that bankers take commercial decisions on the basis of commercial considerations and business decisions will be protected. Oversight committees being set up under the ordinance will give sufficient comfort to the commercial decisions.
Giving the background to the decision to bring the ordinance, he said banks necessarily need to be in a robust position to support growth and if they have unacceptably high level of non-performing assets (NPAs), it hinders their capacity.
In order to empower the RBI in this effort, he said Section 35A was being amended by insertion of Sections 35AA and 35AB. Section 35A deals predominantly with policy directives and matters that relate to the functioning of the banking companies and their policies.
Jaitley said the RBI required to be empowered in relation to specific stressed assets also. "It was doubtful whether the language of Section 35A covered this empowerment and therefore it was felt necessary that RBI should be empowered in this direction."
Tracing the steps taken by the government to deal with the problem, he said that in 2016 the government had enacted the Insolvency and Bankruptcy Code along with substantial amendments to SARFAESI and Debt Recovery Acts in order to ensure expeditious recovery of outstanding debts to banks and financial institutions.
The RBI has been simultaneously exercising its own authority under the Banking Regulation Act.
The minister said there was the Joint Lenders' Forum (JLF) framework prescribed by the RBI, which was currently functioning. "Over the last few years we have been able to bring about certain structural reforms to the economy. One of the key problems that remains is that of stressed assets. Banks necessarily need to be in a robust position to support growth and if they have unacceptably high levels of NPAs, it hinders their capacity."
He said the first part of the ordinance relates to the issuance of the government authorising RBI to initiate the insolvency and bankruptcy proceedings relating to stressed assets and the second to specific directions for formation of oversight committees.
In relation to resolution of the specific accounts either within the bankruptcy insolvency framework or under any other JLF framework, the RBI will be empowered to deal with this matter, he said.
He said there were some other steps being taken. "We are also planning the process that when MoUs are signed with public sector banks, which seek capitalisation then there would be specific provisions in those memorandum of understanding (MoUs) which will be incorporated. They would relate to immediate cash relief initiatives such as sale of assets, closure of non-profitable branches, reduction of overheads, business turnaround initiatives such as strengthening credit appraisal processes under active NPA management and several others."
He said that the RBI and government will continue to work together towards expeditious resolution of the challenge of stressed assets.
"The empowerment of RBI, I hope will enable the issuance of several directions and steps in this regard. This is an ongoing process in which there are resolutions. The JLF resolution took time and without the full approval of the bank, the process used to get delayed. In this connection also, there can be directives and empowerment to RBI," he added.
The minister said the RBI steps will bind everyone under the ordinance. "This will expedite commercial decision making. Keeping the health of the banks intact is one of the focus points of RBI."
Replying to questions he said, "The regulation and to ensure the health of the banking system is one of the primary responsibilities of the RBI. Conventionally, under the Act even powers under 35A was with RBI. So it's only logical that powers under 35AA and 35AB also remain with RBI."
"This action (ordinance) will have a direct impact on 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 NPAs to bring them to a definite conclusion."