RBI can now initiate bankruptcy proceedings

Banking Regulation Act amended to pass order

 Seeking to relieve state-owned banks of mounting bad loans, the government on Friday empowered the Reserve Bank of India RBI to initiate insolvency and bankruptcy proceedings as and when needed.

The new responsibility given to the RBI came through an amendment of the Banking Regulation Act of 1949, through an ordinance  signed by President Pranab Mukherjee late on Thursday night.

“The promulgation of the Banking Regulation (Amendment) Ordinance, 2017, inserting two new Sections (35AA and 35AB) in the Banking Regulation Act enables the Union government to authorise RBI to direct banking companies to resolve specific stressed assets by initiating insolvency resolution process where required,” the executive order said.

It said the RBI has also been empowered to appoint authorities or committees to advise banking companies for stressed asset resolution.

This action of the government will have a direct impact on the resolution of stressed assets, as the RBI will be empowered to intervene in the resolution of non-performing assets.

Briefing reporters on the need for an ordinance, Finance Minister Arun Jaitley said, “The present status quo cannot continue. And the present status quo is that nothing is moving”. The PSU banks are grappling with close to Rs 7 lakh crore of non-performing assets. This had placed immense stress on the banking system and limited its capability to provide fresh loans to the infrastructure sector.

“Sale of assets, closure of non-profitable branches, reduction of overhead and business turnaround initiatives will be part of the resolution process,” Jaitley said.

Speaking about one of the objectives of the ordinance, the finance minister said, “When bankers take decisions on commercial and banking considerations, they must have adequate comfort level.”
He said the new mechanism will expedite commercial decision-making by banks.