The Banking Regulation Act 2017

The Banking Regulation Act 2017 was promulgated on May 4, 2017, with a view to correct the current condition of the Banking sector. The condition of Banking Company(s) currently prevailing in the Indian Economy on account of Non-Performing assets is a well-known fact. This bill was promoted as a measure to curb all the stress, difficulties, and hardships being faced by the banking sector at current times especially in the case of public sector banks.

Public Sector Banks provide huge loans to various corporate institutions in the hope of further expansions, which further default in the repayment of loans due to various reasons. This calls for regulatory action against the defaulters.

In this article, we will discuss in detail about the key aspects of the Banking Regulation (Amendment) Bill, its advantages and implications.

Banking Regulation Act in India:

The Banking Regulation (Amendment) Bill was passed in July 2014 to replace the Banking Regulation (Amendment) Ordinance 2017. The Bill inserted certain new provisions in the Banking Regulation Act, 1949. With these new provisions, it aims to empower the Reserve Bank of India to give directions to the banking company(s) to take strict action against corporate defaulter(s).

There were various reactions to the introduction of the bill. It was declared to be a hopeless and desperate move on the part of the ruling government by the opposition. Many economists consider it as not much beneficial for reviving the condition of the Banking Company(s).

What are the objectives of the Banking Regulation (Amendment) Bill?

The bill was passed with the objective of achieving the following objectives

• Directions to banks for Initiating insolvency proceedings against defaulters:  Through this bill, the RBI is empowered to issue directions to any banking company(s) to initiate proceedings in case of defaulters in loan repayment.  These proceedings would be as per the provisions of Insolvency and Bankruptcy Code, 2016. 
• Issuing of directions on stressed assets:  The RBI is empowered to issue directions to banking company(s) to issue directions to solve the issue of stressed assets.
• Formation of Committee by RBI to advise banks on the resolution of stressed assets:  The RBI will constitute committees or authorities comprising of independent Board members, which will advise banks on the resolution of stressed assets. 
• Reconstitution of the Oversight Committee by RBI. The Oversight Committee (OC) is currently consisting of two Members. The same has been reconstituted by RBI to enlarge it to include more Members to constitute requisite benches to deal with the increasing volume of cases referred to it.
• Applicability of the bill to State Bank of India: The Bill inserts a separate provision, which states that the same is applicable to the State Bank of India, its subsidiaries, and Regional Rural Banks.
• Measures to prevent buying of rating from credit rating agencies: With the introduction of the bill, the RBI is exploring different rating assignments with a view to raise the worthiness of rating agencies and to prevent buying of ratings.

RBIs move after the promotion of the Banking Regulation bill:

Soon after the acceptance of the bill, the Reserve Bank of India issued a directive introducing certain changes to the existing regulations on dealing with stressed assets, NPA meaning, restructured loans, written off assets.

1. Stressed Assets

Stressed Assets act as an indicator of the health of banking companies. They can be defined as the sum of Non Performing assets (NPA), restructured loans and Written off assets.

2. Meaning of NPA: Non-Performing Asset (NPA) is a loan, which has been due for repayment for a period of 90 days or more.

3. Restructured Loans: Restructured assets are those assets for which

• The repayment period has been extended,
• The interest rate has been reduced,
• A part of the loan is converted into equity,
• Additional financing has been provided, or
• Any combination of the above measures

4. Written off assets: Written off assets are those assets, which are written of in the books of accounts and whose payments are not considered/expected by the bank.

What changes did RBI introduce in the Banking Regulation dealing with stressed assets?

The following changes were introduced in the regulations:

• A corrective action plan can now include flexible restructuring, SDR and S4A.
• To facilitate decision making in the JLF, consent required for approval of a proposal was changed to 60 percent by value and 50 percent by number
• Banks against the JLF proposal are either to exit by complying with substitution rules or adhere to the decision of the JLF
• All the participating banks to adhere to JLF without complying to any additional conditions
• The Boards of banks should empower their executives to implement JLF decisions independently
• Non-adherence to any of the above would invite enforcement actions by RBI.

Are there any issues identified in the Banking Regulation bill?

Although the bill was promoted with a view to correct the present scenario of the Banking Sector in the country, some major issues can be identified in the bill.

No doubt the Bill gives power to banks to trigger actions in case of any corporate default but they might face certain difficulties in initiating the proceeding. There are high chances that bankers might fall under political pressure if they try to initiate any proceeding against politically connected or otherwise powerful corporate defaulters.

Once the proceeding s are initiated, the same will be followed by investigations by various investigating agencies such as the Central Vigilance Commission (CVC), Central Information Commission (CIC), CBI, or the Comptroller and Auditor General (CAG). Some bankers might restrain from taking any action due to fear of investigations and subsequent prosecution by the courts.

Conclusion:

One major question this bill has raised is whether it is helpful enough to change the current scenario of the Banking Institutions? Will it be able to solve the problem of ongoing NPAs? Will it help prevent NPAs in the future? As already discussed, there might be fear on the part of bankers of being pressurized politically or being prosecuted by investigating agencies on the initiation of any insolvency resolution. Due to these reasons, Bankers may refuse to trigger any against defaulters. This way the very purpose of the Banking Regulation Bill may fail.