RBI gets more power to deal with bad loans

Central bank can now initiate insolvency process.

In an attempt to clean up the balance sheets of the banks, the Centre on Friday issued orders empowering the RBI to direct banks to initiate insolvency resolution process in case of bad assets under the provision of Insolvency and Bankruptcy Code.

Moreover, the RBI has also been given the right to form oversight committee to direct banks for resolution of bad loans. This comes after the President signed the ordinance on Thursday night to amend the Banking Regulation Act to insert two new sections.

Earlier, bankers, who were part of a lending consortium, found it difficult to trigger bankruptcy proceedings. Many times some of the bankers did not agree with others in resolution of bad loans problem fearing either writing off a part of loan or a potential witch-hunt by investigative agencies.

According to officials, now bankers will be asked to agree to the resolution agreed by majority of the consortium bankers to deal with the bad loan. Now RBI will have the power to shepherd the whole processas the Central bank will be empowered to intervene in specific cases of resolution of NPAs, to bring them to a definite conclusion in case of consortium or multiple banking arrangements.

When Mr Jaitley was asked whether this would save bankers from witch hunt, he replied, “One of the objects will also be that when bankers take commercial decision based on commercial and banking considerations they must have an adequate comfort level and therefore a committee which oversees such joint lenders’ forum arrangements is one step towards that.”

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