On Thursday, the Rajya Sabha passed the Banking Regulation (Amendment) Bill, 2017. The Bill replaces the Banking Regulation (Amendment) Ordinance, that was passed in May 2017, after the Budget session of the Parliament.
What does the Bill do?
The Bill basically empowers the Reserve Bank of India (RBI) to give directions to banks to act against loan defaulters. The Bill seeks to amend the Banking Regulation Act, 1949 by inserting provisions for handling cases related to stressed assets. Stressed assets are loans on which the borrower has defaulted or it has been restructured. The RBI may, from time to time, issue directions to banks for resolution of stressed assets. The Central Government can authorise the RBI to issue directions to banks for initiating proceedings in case of a default in loan repayment. These proceedings would be under the Insolvency and Bankruptcy Code, 2016.
The RBI may also form committees to advise banks on the resolution of stressed assets. The members will be appointed or approved by the RBI.
What is the background?
The Banking Regulation (Amendment) Ordinance was promoted on May 4 to address the reportedly high levels of stress faced by the banking sector at the time.
The RBI had, in June, identified 12 'defaulters' who account for around 25% of India's non-performing assets (NPA) and informed banks to take up insolvency proceedings against them. A NPA is a loan or advance for which the borrower has failed to repay the principle or interest for a period of 90 days. Union Finance Minister Arun Jaitley told the Parliament earlier this month that the "proceedings had been initiated in the 12 cases" and the RBI is expected to refer more cases to the banks.
Mr Jaitley said that the NPAs had begun during the UPA regime and that the sectors that had the most NPAs were Steel, Infrastructure, Power and Textiles. Public sector banks were hit the most as big industrial and infrastructure programmes were supported by them in the hope that there would be further expansion.
On July 24, 2017, the Banking Regulation (Amendment) Bill was passed in the Lok Sabha.
How did the Opposition react?
Trinamool Congress member Sougata Ray said he was opposed to the banking regulation ordinance and said it was a “desperate step by a desperate government.” When asked about the urgency to pass this Bill, Mr Jaitley said that it was "already too late" and that the rising NPAs was affecting banks' capacity to lend money to smaller creditors, which in turn was impacting growth.
