Banking regulation (amendment) ordinance, 2017: A resolute ordinance?

Date01 May 2018
DOIhttp://doi.org/10.1002/pa.1690
Published date01 May 2018
AuthorRaja Shekhar Midthanpally
COMMENTARY
Banking regulation (amendment) ordinance, 2017: A resolute
ordinance?
Raja Shekhar Midthanpally
Department of Business Management,
Osmania University, Hyderabad, Telangana,
India
Correspondence
Raja Shekhar Midthanpally, Department of
Business Management, Osmania University,
Hyderabad, Telangana 500007, India.
Email: rajshkr@hotmail.com
This paper is a write up on the recent Banking Regulation (Amendment) Ordinance, 2017, which
is yet another step in a series of initiatives taken to resolve stressed assets in the Indian banking
system. An ordinance to this effect was promulgated over a bad bankidea as such an entity
would itself be a warehouse of stressed assets and not a resolution mechanism. The paper pro-
vides an overview of stressed assets, aim of the ordinance, immediate steps taken by RBI after
the promulgation of ordinance, and the looming questions that still remain pertaining to resolu-
tion of stressed assets.
1|INTRODUCTION
Laws to deal with lumpy stressed assets are in place, systems are in
place, yet the exacerbating gargantuan problem of toxic Non
Performing Assets (NPAs) is chocking the Indian banking system. By
December 2016, NPAs touched 6.9 lakh crore (Bad loans cleanup
ordinance: From what it is about, why it was issued and will it work,
all you need to know,2017). Total Stressed assets, comprising NPAs,
restructured debt, and advances to companies that will not be able to
service debt and written off debt were much higher at 9.64 lakh
crore, constituting 16.6% of total loans as of December 31, 2016.
Public Sector Banks' (PSBs) gross NPAs rose to 6.06 lakh crore by
December 31, 2016,
1
compared with 5.02 lakh crore during the
entire financial year of 20152016. For the private sector banks, gross
NPAs grew to 70,321 crore by December 31, 2016, compared to
48,380 crore as on March 31, 2016 (Krishnan, Kumar, & Antony,
2017; Verma, 2017). To ensure expeditious recovery of outstanding
debts to banks and financial institutions, the Government of India
had enacted the Insolvency and Bankruptcy Code (IBC), 2016, along
with amendments to SARFAESI
2
and Debt Recovery Acts. The recent
Banking Regulation (Amendment) Ordinance, 2017, is yet another step
in a series of initiatives
3
taken to resolve stressed assets in the Indian
banking system (IANS, 2017). An ordinance to this effect was
promulgated over a bad bankidea as such an entity would itself be
a warehouse of stressed assets and not a resolution mechanism
(Roychoudhury, 2017). The Parliament had approved the Act in August
2017 and replaced the ordinance of May 2017 (PTI, 2017).
What does the Banking Regulation Act (BR Act) ordinance do? It
authorises and empowers the RBI to direct banking companies to
resolve specific stressed assetsparticularly in consortium or multiple
banking arrangements by initiating insolvency resolution process in
respect of a default under the provisions of the IBC, 2016
(Chakravarty, 2017; Ministry of Finance, Department of Financial Ser-
vices Order, 2017). Section 35A of BR Act, 1949, deals with policy
directives, banking policy, matters that relate to the functioning of
the banking companies. Though the RBI had powers under Section
35A of the BR Act, 1949, to issue guidelines for the banking compa-
nies, they were not specific to deal with stressed assets (Bad loans
cleanup ordinance: From what it is about, why it was issued and will
it work, all you need to know,2017). It was doubtful that whether
the language of Section 35A covered the empowerment of RBI to issue
guidelines or directions in relation to specific stressed assets. How-
ever, there were also not any explicit provisions that forbade RBI in
exercising such powers (Nageswaran, 2017). Therefore, the ordinance
seeks to incorporate Sections 35AA and 35AB to BR Act, 1949. The
first section relates to issuance of the Government of India authorising
the RBI to initiate insolvency and bankruptcy proceedings in relation to
any stressed assets. The second section relates to specific directions to
initiate any nonIBC restructuring mechanism, resolution plans as part
of IBC, including formation of committees and oversight committees
that were earlier the domain of only Scheme for Sustainable Structur-
ing of Stressed Assets (S4A). The RBI would now be empowered to
deal with stressed assets in relation to resolution of specific accounts,
either within the bankruptcy and insolvency framework or under any
1
Figures are for only three quarters of a financial year.
2
The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 is also known as the SARFAESI Act
3
Alphabetsoup of restructuring mechanisms initiated by the RBI over the last
few years include Asset Quality Review (AQR), Asset Reconstruction Companies
(ARCs), Corporate Debt Restructuring (CDR), 5/25 scheme, Strategic Debt
Restructuring (SDR), and Scheme for Sustainable Structuring of Stressed Assets
(S4A)
Received: 30 October 2017 Accepted: 21 November 2017
DOI: 10.1002/pa.1690
J Public Affairs. 2018;18:e1690.
https://doi.org/10.1002/pa.1690
Copyright © 2017 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/pa 1of3

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