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Bad loans: Cabinet approves ordinance to change key banking law

President's nod expected on Wednesday night; move will set stage for tough action on chronic loan defaulters.

May 04, 2017 / 08:50 AM IST

The Union Cabinet on Wednesday approved the promulgation of an ordinance to amend the Banking Regulation Act, preparing ground to take tough action against chronic bank loan defaulters.

The ordinance, which will likely receive Presidential assent on Wednesday night, could allow the Reserve Bank of India (RBI) to deal with bad loans on a case-to-case basis as opposed to following a set of broad guidelines and rules for all non-performing assets (NPAs).

"Some important decisions have been taken on the banking sector by the Cabinet," said Finance Minister Arun Jaitley. "The details of the decisions for the banking sector will be announced after the President's nod."

India’s banks have been beset with non-performing assets (NPAs), loans that have turned bad. Total NPAs at the end of December 31, 2016 is estimated to have crossed Rs 7 lakh crore.

The RBI and the government had earlier asked banks to impose a strict ban on any new loans to wilful defaulters. Such borrowers are also now barred from being appointed as directors on boards of companies.


The new law may also likely empower banks to force lingering corporate loan defaulters to forego ownership and voting rights in their companies, allowing lenders to induct new management leadership mandated to turnaround these entities within a specified time frame.

The fresh set of rules may also allow banks to separate the outstanding unpaid debt into sustainable and unsustainable parts to better restructure loans.

Banking industry sources said that the government has collated details on bad loans worth nearly Rs 50,000 crore that need immediate action against promoters and directors of chronic defaulters.

The new law will also likely legally ring-fence bankers from scrutiny from investigating agencies, which many bankers say often restrict lenders to get after chronic defaulters.

The top wilful defaulters' list prepared by the government and banks includes a string of diamond traders, two now-grounded full service airlines, a media house with operations across the country, a multi-state agricultural cooperative, mining companies, realty developers, garment brands, and several individual proprietors.

These "wilful defaulters" have not repaid bank loans despite having the capacity to do so. Some of these have been found to have diverted funds to projects other than those for which the loan was availed, while some others have been found to have sold of assets that were pledged to get loans without knowledge of the banks.

Wilful defaults are the worst kind of bad loans that empower banks to get after the promoters and directors by even naming and shaming them through public notices and advertisements for not paying up on loans, which banks believe that they have the ability to honour.

Former RBI governor Raghuram Rajan had set banks a March 2017 deadline to clean up their balance sheets.

Mounting bad loans and high default rates by large companies have drawn criticism from experts and regulators.
first published: May 3, 2017 09:04 pm
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