Banking Regulation (Amendment) Bill Passed

IAS Prelims 2023

The Rajya Sabha has passed the Banking Regulation (Amendment) Bill, 2017. The Bill replaces the Banking Regulation (Amendment) Ordinance, that was passed in May 2017.

On July 24, 2017, the Banking Regulation (Amendment) Bill was passed in the Lok Sabha.

The Banking Regulation (Amendment) Ordinance was promulgated on May 4 to address the reportedly high levels of stress faced by the banking sector at the time.

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.

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.

The RBI had 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.

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.

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.

The NPAs are loans given by banks, where the borrower has stopped making interest or principal repayments for over 90 days.

Over the years, NPAs, as a proportion of total loans extended by banks have increased from 2.3% in 2008 to 7.5% in 2016, which amounts to more than Rs 6 lakh crores. The current level of the NPAs indicate a stressed banking system where the lending capacity of banks is limited, thereby affecting investment and economic growth.

In 2016, a parliamentary standing committee had observed that a majority of the stressed assets were in the five sectors of infrastructure, iron and steel, textiles, aviation and mining (including coal).

RBI data indicates that loans given by public sector banks account for 88% of the NPAs in the country. As a majority shareholder in these banks, the government had the authority to initiate recovery of 88% of the NPAs under the IBC without involving the RBI or making legislative changes.