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The Banking Regulation (Amendment) Ordinance, 2017 – a positive step for the banking industry 

In June 2017, the apex banking body in India – the Reserve Bank of India (RBI) – identified 12 loan defaulters. The total default value of these defaulters was almost 25% of the bad loans or Non-Performing Assets (NPA) in the banking industry in the country. In this article, we will discuss The Banking Regulation (Amendment) Ordinance, 2017 – a positive step for the banking industry .

Non-Performing Assets of public sector Banks during the time	Rs. 6.64 lakh crore
Total Stressed Assets of Banks during the time (public + private sector)	Rs. 8.02 lakh crore

What is NPA?

These are loans or advances where the borrowers have not been able to pay either the principal or the interest in a period of 90 days from the stipulated time period. 

Which are the industrial sectors that had the NPAs predominantly?

• Steel
• Infrastructure
• Power
• Textiles

How did the nationalized banks come into the picture?

Public sector or nationalized banks turned out to the biggest lenders to the large industrial and infrastructure projects that had the promise of becoming big-time hits and do considerably well in the future with expansion plans.

What was the need of the Ordinance?

As per the ruling government, the Ordinance should have been passed a long time back. The requirement was critical now because banks were facing a fund shortage situation because of the non-performing assets, bad loans, and stressed assets. Despite concerted efforts by the banking industry and the government, the situation seemed to be going out of hand.

While initially the reason behind the stuck-up situation was attributed to issues with the availability of raw materials for mega projects and land acquisition hassles, later the problem magnified to insurmountable limits. Part of the problem was also that the banking industry was giving loans without adequate checks in the last decade.  The banks were lending huge amounts without even safeguarding their interests and having proper laid down repayment plans from the borrower.

As a result, in the next few years, the situation started to limit their capacity or rather choke them of funds to give further loans to small creditors and that in turn started to affect the overall economy of the country. Even with many schemes the RBI introduced, the toxic debt situation seemed far from being resolved which prompted the central government to step in and give additional powers to the apex bank to help the banking industry especially the multiple banking consortiums to resolve the NPA and stressed assets situation. Hence it was essential that the apex bank is given the right to intervene and resolve the situation.

As per the Finance Minister, Mr. Arun Jaitley, even getting 40-50 of the major corporate borrowers to pay up the defaulted principal or interest amount was enough to resolve the financial crisis on an immediate basis.

Data available from the Financial Stability Report 2016 issued by RBI states that:

• Mega or large borrowers – defined by the RBI as debtors who have exposure exceeding Rs. 5 crore or more for lenders – account for almost 56% of the banking industry debt and 88% of the banks’ Non –Performing Assets.
• It also mentioned that such large borrowers or defaulters were about 50 in number.

The Credit Suisse estimated that almost 40% of the debtors are companies that have an interest coverage ratio of less than 1.

It is interesting to note that when the amendment was announced as the Bill was introduced in the Parliament, the market and the industry welcomed it with open hands so much so that bank shares gained as much as 6% immediately on the opening of trading on the day of the announcement.

What are Stressed Assets?

These are primarily loan accounts where the borrower has either defaulted in terms of repayment of the loan or the schedule of repayment had to be reworked out because of the inability of the borrower to pay.

What are the details of the Ordinance?

1. The Banking Regulation (Amendment) Ordinance, 2017 was promulgated on 4^th May 2017 by the President of India.
2. By virtue of the Banking Regulation (Amendment) Ordinance, 2017, a provision related to the handling of Stressed Assets was inserted in the Banking Regulation Act, 1949.
3. Two new sections (35AA and 35AB) were introduced in the Banking Regulation (Amendment) Ordinance, 2017.
4. Under Section 35A of the Banking Regulation Act, 1949, the central government has the powers to authorize the RBI to issue required directions to any bank (company or companies) to resolve their stressed assets and start with an insolvency resolution process against the defaulter under the Insolvency and Bankruptcy Code, 2016.
5. Further, the RBI can, from time to time, issue directive to any bank (company or companies) to resolve their Stressed Assets.
6. The RBI also has the power to specify certain authorities or form committees to advise the banks in the context of the resolution of such stressed assets. Such authorities or committee may be appointed by RBI or it needs to approve the said appointments.
7. All these provisions are applicable to the State Bank of India too along with its subsidiaries. The provisions of the Ordinance are applicable to the Regional Rural Banks (RRBs) too.
8. The Banking Regulation (Amendment) Ordinance, 2017bill after being introduced in the Parliament (Lok Sabha approved of it much before the Rajya Sabha) was finally passed on 24^th July 2017 after much debate and discussion.

What happened after the Ordinance came into force?Banking Regulation What happened after the Ordinance came into force?

1. The Overseeing Committee (OC) was brought under the supervision and aegis of the Reserve Bank of India. The number of members was increased to 5. The main responsibility of the OC is to reassess cases and help in the faster resolution of such cases where the aggregate exposure of banks to borrowers exceeds Rs. 500 crores.
2. After the Ordinance came into action, the RBI instructed the concerned banks to initiate proceedings of insolvency and bankruptcy against the 12 major defaulters.
3. An Internal Advisory Committee also called the IAC was formed by the RBI for referring accounts for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC). The IAC is responsible for recommending for such insolvency and bankruptcy cases that have fund and non-fund based outstanding exceeding Rs. 5000 crores. Of this amount, 60% or more had to be termed as non-performing by banks as of 31^st March 2016.
4. Some of the big defaulters which had more than Rs. 5000 crore outstanding loans with banks were –
5. Essar Steel
6. Bhushan Steel
7. ABG Shipyard
8. Electrosteel
9. Alok Industries
10. For NPCs that did not feature under the above-mentioned criteria, the IAC instructed the concerned banks to sit with their large defaulters and come up with a settlement or a resolution plan within the next six months.
11. The resolution plan could be either restructuring of the loan or liquidating the assets of the borrower.
12. However, if within this period of six months the resolution plan could not be drawn then banks were instructed to file for insolvency proceedings under the Insolvency and Bankruptcy Code, 2016

Conclusion

The Ordinance has been welcomed by the banking industry especially as it is seen as a progressive step. The new Ordinance empowers RBI to protect banks from vigilance authorities posing probing questions though it cannot as such protect the banks from being questioned by these vigilance authorities.