Banks Can Now Address NPAs More Effectively

The promulgation of the ordinance amending the Banking Regulation Act, 1949 is a very timely decision, stresses Prem Rajani, managing partner of the legal firm Rajani Associates.

- N. Mohan

N. Mohan: What are the major enabling provisions in the recent ordinance amending the Banking Regulation Act? Do you think it is an effective measure to resolve NPAs issues?

Prem Rajani: The ordinance basically provides for two enabling provisions in the Banking Regulations Act, 1949 (the BRA), wherein RBI has been empowered to issue directions to the banks (i) to initiate action against defaulters in terms of the Insolvency and Bankruptcy Code, 2016 (Insolvency Code); and (ii) for resolution of the stressed assets and formation of any committee for the said purpose.

I believe the ordinance is likely to be an effective measure to resolve the issue of NPA. Pursuant to the Ordinance, the RBI has issued a circular wherein it has, inter alia, clarified that (i) a corrective action plan could include flexible restructuring, SDR, S4A, (ii) facilitated the decision making in Joint Lenders’ Forum (JLF) meetings by reducing the required percentage from 75% to 60% in value, and (iii) empowered the executives of banks to implement JLF decision without any further reference to bank board.

The RBI is also in the process of constituting a committee to advise the banks for decision making for cases, which should be referred under the Insolvency Code. However, how far the insolvency proceedings are likely to succeed is yet to be seen, considering that the insolvency regime itself is at very nascent stage.

It is a fact that lack of capital for the banks is the main hurdle, especially for the public sector banks, in coming out of the crisis. The ordinance does not necessarily address this issue.