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The Banking Regulation Act 2017

The Banking Regulation Act 2017

The Banking Regulation Act 2017 was promulgated on May 4, 2017, to correct the banking sector’s current condition.  The condition of Banking Companies (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 current stress, difficulties, and hardships faced by the banking sector, especially in the case of public sector banks.

Public Sector Banks provide considerable 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.

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 of 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. The opposition declared it a hopeless and desperate move on the part of the ruling government.  Many economists consider it as not much beneficial for reviving the condition of the Banking Company(s).

Salient Features of the Banking Regulation Act 2017

  1. Empowering the Reserve Bank of India (RBI): The Act conferred additional powers upon the Reserve Bank of India, the nation’s central banking institution.  The RBI was now vested with more authority to supervise and regulate banks effectively.  It could intervene promptly to tackle issues like mergers, acquisitions, and resolution plans for stressed assets.
  2. Prompt Corrective Action (PCA): The Act introduced the PCA framework, which enables the RBI to identify banks facing financial stress and take corrective measures accordingly.  By intervening at an early stage, the RBI can prevent the deterioration of bank assets and enhance their performance.
  3. Resolution and Restructuring Mechanism: The Act introduced a comprehensive resolution framework, allowing the RBI to deal with cases of bankruptcy, insolvency, or even the potential failure of a bank efficiently.  It laid the groundwork for managing failing banks and protecting depositors’ interests.
  4. Enhanced Corporate Governance: Recognizing the importance of good governance in banks, the Act mandated stronger corporate governance standards.  It emphasized the independence of boards, risk management practices, and increased disclosure requirements.
  5. Strengthening Oversight of Public Sector Banks (PSBs): Public Sector Banks (PSBs)1 have been a critical component of India’s banking system. The Act aimed to enhance the governance and accountability of PSBs to improve their operational efficiency and risk management capabilities.
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What are the objectives of the Banking Regulation (Amendment) Bill?

The bill was passed to achieve the following objectives.

  1. 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 Insolvency and Bankruptcy Code, 2016 provisions.
  2. 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.
  3. Formation of Committee by RBI to advise banks on resolving stressed assets:  The RBI will constitute committees or authorities comprising independent Board members advising banks on resolving stressed assets.
  4. Reconstitution of the Oversight Committee by RBI.  The Oversight Committee (OC) is currently consisting of two Members.  RBI has reconstituted the same to enlarge it to include more Members to constitute requisite benches to deal with the increasing volume of cases referred to it.
  5. 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.
  6. Measures to prevent buying of ratings from credit rating agencies: With the bill’s introduction, the RBI is exploring different rating assignments to raise the worthiness of rating agencies and prevent buying of ratings.

RBIs move after the promotion of the Banking Regulation bill:

  1. 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, and written-off assets.
  2. Stressed AssetsStressed 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.
  3. Meaning of NPA: Non-Performing Asset (NPA) is a loan that has been due for repayment for 90 days or more.
  4. Restructured Loans: Restructured assets are those assets for which
  5. The repayment period has been extended,
  6. The interest rate has been reduced,
  7. A part of the loan is converted into equity,
  8. Additional financing has been provided, or
  9. Any combination of the above measures
  10. Written-off assets: Written-off assets are those assets which are written off in the books of accounts and whose payments are not considered/expected by the bank.

Impacts of the Banking Regulation Act 2017

  1. Increased Financial Stability: With stronger regulatory powers and the ability to intervene promptly, the RBI can now address issues at an early stage, thereby minimizing risks to financial stability.  The Act’s provisions have bolstered the confidence of depositors and investors in the banking system.
  2. Improved Asset Quality: The PCA framework has prompted banks to take corrective measures, resulting in a more proactive approach to managing NPAs.  Consequently, the quality of bank assets has improved, leading to increased credit availability to the economy.
  3. Governance and Transparency: The Act’s emphasis on corporate governance has led to more transparent operations in banks.  By strengthening the independence of boards and promoting risk management practices, the Act has fostered a culture of accountability and transparency in the banking sector.
  4. Resolution of Stressed Assets: Introducing a resolution and restructuring mechanism has been instrumental in effectively handling distressed banks. The RBI’s intervention in such cases has prevented potential systemic shocks and provided a roadmap for resolving financial stress.
  5. Encouraging Competition and Innovation: The Act’s focus on strengthening the banking system has paved the way for healthy competition and innovation in the sector.  New-age banks and financial institutions can now operate more clearly and in a regulated environment.
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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 per cent by value and 50 per cent 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 are to adhere to JLF without complying with 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 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 chance that bankers might fall under political pressure if they try to initiate any proceedings against politically connected or otherwise powerful corporate defaulters.

Once the proceedings 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.

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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.


How did the Banking Regulation Act 2017 address issues faced by banks in India?

The Banking Regulation Act 2017 aimed to address challenges like mounting NPAs, inadequate governance, and fraud in India’s banking sector.  It empowered the RBI with additional supervisory authority, introduced Prompt Corrective Action (PCA) for early intervention, and established a comprehensive resolution mechanism to manage failing banks efficiently.

What role does the RBI play in the Banking Regulation Act 2017?

As the central banking institution, the RBI plays a crucial role in the Act.  It is granted enhanced regulatory powers, allowing it to supervise and regulate banks more effectively.  The RBI can promptly intervene in matters such as mergers, acquisitions, and resolution plans for stressed assets to maintain financial stability.

How does the Act encourage corporate governance in banks?

The Banking Regulation Act 2017 mandates stronger corporate governance standards for banks.  It emphasizes the independence of boards, promotes risk management practices, and increases disclosure requirements.  These measures aim to foster accountability and transparency in the banking sector.

What impact has the Act had on India’s financial stability?

The Act has contributed to increased financial stability by empowering the RBI to address issues at an early stage.  With the introduction of the PCA framework and resolution mechanism, the Act has minimized risks and bolstered confidence among depositors and investors in the banking system.

How has the Banking Regulation Act 2017 encouraged competition and innovation in the banking sector?

The Act’s focus on strengthening the banking system has paved the way for healthy competition and innovation.  New-age banks and financial institutions can now operate in a regulated environment with greater clarity, fostering a more dynamic and innovative sector.



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