An ordinance to further amend the Banking Regulation Act 1949 was issued by the President of India on 4th May 2017 related to managing the stressed assets in the banking system to produce better results.
This is a water shed moment in Indian banking when not a day passes without mentioning of how a few borrowers took the banks to unknown territory on non-recovery, reluctance on part of banking executives, particularly in nationalized banks, not to extend financing activities due to excessive zeal shown by parliament, central vigilance officials or the news writers who curse every one for the poor health of the banking system. It is also fashionable to blame the poor banking executives for all the evils of the economic scene.
Now, the real question arises, as to why this ordinance gets much importance particularly, when it is only a 2-page document which basically contains the following statements:
- The central government may by order authorize the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of Insolvency and Bankruptcy Code 2016.
- The word default is explained under the Bankruptcy code 2016.
- Reserve bank my issue directions to banking companies for resolution of stressed assets’
- The Reserve Bank may specify one or more authorities or specify members for committees to deal with the stressed assets.
The following information cullied out from RBI / leading financial newspapers may also help us to understand the recent ordinance in a clearer manner.
- As on 2012, the gross NPA stood at Rs 1.3 trillion and constituted 2.8% of total advances of banks. The situation worsened in 2016 when it went up to Rs 6.7 trillion and was 9.6% of total advances.
- Large borrowers (defined as Rs. 5 Cr exposure for each borrower by RBI) Standing at 72.8% of NPAs of the banking system as on March 2015, with 58% of total advances, stood at 56% of the total advances but with 88% of NPAs of banking system. Sad but true, in the real sense.
- According to IMF study, many of the public-sector banks may have to make provisions of nearly 3 years’ earnings towards NPA provisions. Naturally, the public-sector banking system is slowly but surely sinking to a point of no return.
- IMF sources further foresee nearly one third of public sector banking units breaching Basel 3 capital adequacy norms.
- According to the speech given by Finance Minister, Government of India recently to TV channels if the public-sector banks would focus on top 40-50 big borrower accounts who constitute towards 88% of NPA sector, the banks would return to normalcy.
- The chairman of Insolvency and Bankruptcy Board of India recently stated that the system is ready to handle transactions where the insolvency resolution process has been initiated in banks.
Amendments to Banking Regulation Act coming on the heels of the enactments of Insolvency and Bankruptcy code and amendments to SARFAESI and Debt Recovery Tribunals show the real intentions of the central government to tackle the NPA issues which threaten the continued existence of nationalized banks and the ever-demanding equity demands from the central government. Bankers are wary of taking bold decisions to refer the borrowing units boldly to resolution since the vigilance departments of public sector banks doubt the intentions of bankers who want to take decisions. The lien on the provident funds of some of the senior bankers who retired recently by vigilance authorities did not portray their good intention towards reviving the health of the public-sector banks.
Many of the CEOs of the public-sector banks explained recently during their periodical meeting with Finance ministry/RBI officials the apprehension of bank executives towards finding resolution to NPA accounts.
What to expect further from the issue of the ordinance?
It is expected that the central government would also amend some section of Prevention of Corrupt Act to boost up the morale of banking executives who would boldly take decisions while dealing with NPA sectoral advances.
By empowering RBI to form new committees who would help the bankers to find immediate resolution of NPA sector and also make better coordination among the banks, the ordinance is really a sincere attempt by the Central government to uplift the health of the banking sector.
Conclusion
Being a retired banker from a leading nationalized bank, it is but natural for me to keep a tap on the latest development in banking sector which has been showing deteriorating results. I would venture to say that both the public and private sector banks contributed towards the increasing NPA scene. This prompted me to write this small write up on the issuance of The Banking Regulation (Amendment) Ordinance, 2017 which though small in pages but huge towards lifting the morale of the whole banking sector. Some of the facts have been quoted from leading financial newspapers of the nation who measure the real health of our economy. With the best working condition and adequate independency, they have reached world level excellence and are really respected in India and abroad.
I am confident that this ordinance measured from a year from today, would have lifted the banking scene and most of the banks would have started the process of reviving their health which would ultimately help good industrial units to get cheaper, timely and faster credit for industrial development.
Who does not want us, India, to be the fastest growing country in the world?
Reference:
- The Gazette of India, extraordinary, part 2 section 1 published by authority, by Ministry of Law and Justice (Legislative Department) , New Delhi on 4th May 2017, titled “THE BANKING REGULATION(AMENDMENT) ORDINANCE, 2017 – NO 1 OF 2017. Promulgated by the President in the 68th year of the Republic of India.
- Business line newspaper dated May 8, 2017
- Financial express dated May 5, 2017
- Live Mint dated May 4, 2017
- All the newspapers contained articles on the recent ordinance issued by the President of India quoted above.
About the author : Subramanian Natarajan C.P.A. (USA), M.Sc., CAIIB took voluntary retirement in 2000 from Punjab National Bank after handling various facets of banking like deposit mobilization, foreign exchange, auditing and borrower accounts. After living in USA for 12 years during which period he worked in international auditing firms specializing in international tax, auditing, IFRS etc., he continues his practice in New Delhi, India. He can be reached at subcpa@gmail.com. Tel: 7503562701, 9015613229. He currently lives in Delhi. His name appears as tax consultant in web site of American embassy, New Delhi. He is thankful to various suggestions received from readers and is delighted to see the enormous enthusiasm of readers.
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