India passes bill on action against loan defaulters
Bad loans of public sector banks reached the staggering amount of 6.41 trillion rupees.
The Banking Regulation (Amendment) Bill empowering the Reserve Bank of India to direct lenders to act against big defaulters was accorded parliamentary approval on Thursday with the Rajya Sabha adopting the measure and Finance Minister Arun Jaitley underlining the urgency of resolving the banks' bad loans issue as it was affecting their capacity to support growth.
The bill, which amends the Banking Regulation Act, 1949, will replace the Banking Regulation (Amendment) Ordinance, 2017, that enabled the Reserve Bank of India (RBI) earlier in the matter.
Replying to the debate on the Bill, Jaitley said non-performing assets (NPAs), or bad loans, of public sector banks as on March 31 of this year had steadily increased to reach the staggering amount of 6.41 trillion rupees. Besides, taken together with the figure of "stressed assets", the bad loans of state-run banks added up to over 8 trillion rupees.
"You ask what is the urgency... it is already too late," Jaitley said replying to the debate in the Rajya Sabha on the Banking Regulation (Amendment) Bill which allows the Centre to authorise the RBI to direct banks to initiate recovery proceedings against loan defaulters.
"The delay in resolution of NPA is impacting the capacity of banks to lend to support growth and lend to small investors," the Finance Minister said.
"Besides, these NPAs have been piling up. The interest is increasing so the bad debts are increasing," he said, in response to a member's query on the urgency of bringing in the legislation that will replace an ordinance. "The banks will slowly start realising the money, companies will continue to function, the jobs at the company will be saved... that's why the urgency," he added.
NPAs of banks have risen to over 8 trillion rupees and the RBI is now being given power to refer these cases to the Insolvency and Bankruptcy Board.
Loans turn into NPAs 90 days after the debtor loses the ability to service the loan by way of interest payments or by repayment of the principal amount.
Under the bill, the central government may authorise the RBI to issue directions to any banking company to initiate insolvency in respect of a default under the provision of the Insolvency and Bankruptcy Code.
It also has provisions empowering the RBI to issue directions to banks for resolution of stressed assets.
The sectors most responsible for the accumulated NPAs are steel, power, textiles and infrastructure.
Last month, the RBI identified 12 large loan defaulters who account for 25 per cent of the total NPAs, or bad loans, in the banking sector.
Action has already begun under the Insolvency and Bankruptcy Code against some of these defaulters, including Essar Steel, Bhushan Steel and Bhushan Power and Steel.
Jaitley told the Lok Sabha last month - when the lower house approved the measure - that a company defaulting on loans cannot claim the right of equality in treatment as regards repaying the loans. He said defaulting companies cannot ask why it was being targeted when some other defaulters were being let free.
The bill inserts a provision to state that it will also be applicable to the State Bank of India, its subsidiaries, and Regional Rural Banks.