Bill to ratify bad loan ordinance on govt’s priority list in Parliament’s monsoon session

The government may introduce the Bill to ratify the ordinance to amend the Banking Regulation Act in the first week of the Parliament’s monsoon session that begins on July 17.

The ordinance, promulgated in May, empowers the Reserve Bank of India (RBI) and banks to initiate bankruptcy proceedings against chronic defaulters.

The amended section 35A of the Banking Regulation Act will allow RBI, “from time to time,” to issue directions to the banking companies for resolution of stressed assets.

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In June, the Reserve Bank of India (RBI) said that it had identified 12 accounts totaling about 25 per cent of the current gross non-performing assets (NPAs) of the banking system for immediate reference under Insolvency and Bankruptcy Code (IBC).

The Gujarat High Court will commence hearings on the Essar Steel vs RBI on July 12.

The RBI had directed Essar Steel lenders to refer the debt-laden steel firm to National Company Law Tribunal for insolvency proceedings. Essar had moved the court against proceedings.

Also read: Essar Steel vs RBI: Gujarat High Court postpones hearing case to July 12

It had questioned the cut-off date of March 31, 2016 fixed by the RBI for selecting the 12 accounts to be filed at the National Company Law Tribunal (NCLT) under IBC.

The ordinance empowers RBI to move against defaulters under the Insolvency and Bankruptcy Code, 2016. The code allows lenders to immediately suspend the board and strip promoters’ powers. It also allows an insolvency professional to take control of a corporate loan defaulter. The Code provides for a time-bound recovery of NPAs or bad loans.

Earlier, banks were hesitant to agree on one-time settlement fearing scrutiny from investigation agencies. The new law allows RBI to deal with bad loans on a case-to-case basis. RBI’s oversight on specific stressed assets may prompt banks to move speedily on resolution of bad loans.

Also read: Loan defaulters beware! Modi govt notifies new Banking Regulation Act

The RBI and the government had also asked banks to impose a strict ban on any new loans to wilful defaulters—borrowers who have the capacity to repay but haven’t. Such borrowers are also now barred from being appointed as directors on boards of companies.

The government said the bad loans have reached “unacceptably high levels” and “urgent measures are required for their resolution”

The new law also 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.