On 3 May 2017, the Cabinet amended the Banking Regulation Act, 1949 to address India’s problem with bad loans and non-performing assets (NPAs). The Cabinet’s amendment put in place a scheme to resolve stressed assets in the banking system – which totalled to about Rs 9.64 trillion as of December 2016.
On 4 May, the President gave his assent to the Cabinet’s ordinance, thus giving the Reserve Bank of India (RBI) a broad range of powers to tackle bad loans.
Details of the amendments are yet to be made public.
The Banking Regulation Act
The Banking Regulation Act regulates all banking firms in India. Initially, the law was applicable only to banking companies. In 1965 it was amended to make it applicable to cooperative banks and to introduce other changes.
The Cabinet amended Section 35A of the Act. This Section defines the powers of the RBI, detailing the supervisory powers of the RBI (explained in pages 56 to 61 here).
India’s bad loans problem
In the last three years, the RBI has been struggling to resolve the bad loan problem. In May 2016, former RBI Governor Raghuram Rajan initiated the Asset Quality Review (AQR) through which the RBI had asked the banks to report stressed loans or even non-performing ones (more details here).
Some of the findings of the AQR were:
A watchlist of potentially bad loans were unearthed.
Raghuram Rajan confessed that the earnings of state-run banks do not look “pretty”.
The findings of the AQR caused the public sector banks market capitalisation to drop due to the poor numbers.
The RBI also asked banks to clear their balance sheets by 2017.
Government says the system will now be more effective in handling bad loans
Finance Secretary Ashok Lavasa told reporters that Wednesday’s amendments to the Banking Regulation Act will help in effectively resolving the bad loans problem.
“It is not possible for me to put down a number on how this (NPAs) will go down, but certainly we feel that these changes will make the system more effective in handling the bad loans,” he said. “We should be able to reach a resolution in many of the cases with the professionalism in the banking system and the participation of promoters themselves.”
The government is expected to make the details of the amendments public soon.