Amendment of the Banking Regulation Act

By Himani Gandhi

The ordinance to amend Banking Regulation Act allows RBI to ask banks to sit down with loan defaulters and reach a settlement as part of the bad loans resolution package.

• The Ordinance amends the Banking Regulation Act, 1949 to insert provisions for recovery of outstanding loans.  Under these provisions, the central government may authorise the Reserve Bank of India to direct banks to initiate recovery proceedings against loan defaulters.  

• These recovery proceedings will be under the Insolvency and Bankruptcy Code, 2016.  The Code provides for a time-bound process to resolve defaults by either (i) restructuring a loan (such as changing the repayment schedule), or (ii) liquidating the defaulter’s assets.

• The RBI may from time to time issue directions to banks for resolving stressed assets.  Stressed assets are loans where the borrower has defaulted on repayment, or loans which have been restructured. 

• The RBI may specify authorities or committees to advise banks on resolving stressed assets.  Members on these committees will be appointed or approved by the RBI.

Before we get to the analysis of the amendment, we need to envision what is coming in the evolution of the bankruptcy process in India. We conjecture that in the early years, recovery rates will be poor, for four reasons:

• We must remember that the IBC is itself new. The institutional infrastructure for the IBC works poorly, as of yet. It will take time for IBC to work well.
• India is short of professional participants in the Insolvency Resolution Process of the IBC. For example, as yet foreign capital has been largely blocked. There will be fewer participants and the highest bid will be a bargain.
• The IBC is best applied at an early stage in the difficulties of a company, but most existing NPAs have been ripening for many years. For those cases, there is really nothing to be done but to pick at the bones of the corpse.
• Inexperienced creditors’ committees are likely to turn down offers that look bad, and later discover that the recoveries in liquidation are worse. It takes capability in a creditors’ committee to vote correctly. Even when human skills are present, decisions may often be adversely affected by policy and regulatory constraints. It will take time for those policy and regulatory constraints to be addressed.