The Banking Regulation Ordinance: An imperfect solution to a perfect problem?
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The Banking Regulation Ordinance: An imperfect solution to a perfect problem?

Varun Marwah

President of India Pranab Mukherjee last week approved the Banking Regulation (Amendment) Ordinance, 2017, which made amendments to the Banking Regulation Act, 1949 (BRA). The Ordinance in effect gives more powers to the Reserve Bank of India which (apparently) hitherto did not exist.

While the Ordinance carries the force of law, it will still need to be validated when both Houses of the Parliament meet in the next session.

By way of the Ordinance, two new sub-sections namely, 35AA and 35AB have been added to Section 35A.

Section 35A is a broadly worded section, which gives the RBI power to issue directions to any ‘banking company’ in ‘public interest’. It is being said that the insertion of these two new sections has given more teeth to the RBI to intervene in the functioning of banking companies.

The two new sections, which empower RBI to intervene in the resolution of stressed assets, provide for the following measures:

  • RBI may direct banks to commence the insolvency resolution process, against defaulting borrowers, under the Insolvency and Bankruptcy Code, 2016 (Bankruptcy Code);
  • RBI may give any directions it wishes to banks for resolving stressed assets; and
  • RBI may set up one or more advisory/supervisory committees to advise banks on resolving stressed assets.

This is the latest attempt by the government to tackle the huge pile of bad loans that is plaguing the Indian economy, as is evident from the preamble of the Ordinance.

WHEREAS the stressed assets in the banking system have reached unacceptably high levels and urgent measures are required for their resolution

Right after the President gave his assent to the Ordinance, the RBI also issued another notification for ‘Timelines for Stressed Assets Resolution’ [pdf], amending the existing Joint Lenders Forum (JLF) norms. JLFs were intended to recognize stressed assets early and come up with a corrective action plan (CAP) within 45 days.

This is in continuation and modification to the entire gamut of already existing restructuring schemes (CDR, 5/25, SDR, S4A). Jayesh H, Founding Partner of Juris Corp adds,

SDR, S4A, et al. have failed to deliver and unfortunately, there is still a reluctance to admit that. 

The new power is to be able to push the government banks to accept economic reality instead of just keep kicking the can down the road. Hopefully this will deal with the ‘Not while I am at this Post syndrome’.

The RBI notification is another shot at making JLF work. Ironically it is at odds with IBC. It still does not address the real cause for failures.

But India’s is a unique case, wherein the banking regulator not only regulates but also supervises the commercials of the resolution of stressed assets. So will this new amendment create a certain conflict of interest? Jayesh says no.

RBI will be directing the nature of action to be taken and doubt that it will get into commercials in any manner.

But here’s why these amendments have probably got undue media attention:

Legally speaking, Section 35A of the BRA included within itself wide enough powers to act on matters of the nature envisaged in the Ordinance. One can only speculate that this is more of a political green signal to the RBI to act rather than a legislative one. (Read: reluctance on part of bankers to initiate insolvency resolution against politically connected corporate borrowers).

So does the Ordinance makes RBI’s advice binding on banks? Not in all cases, according to a government official.

But what it will do is provide enough courage to bankers that have been afraid of taking decisions on resolution of bad loans, for reasons such as political pressures and fear of investigation, especially after the recent arrest of the ex-IDBI Bank CMD in connection with loans to Kingfisher Airlines.

Section 35AB envisages the creation of committees by the RBI which will advise banks companies on how to resolve stressed assets.

When can these committees be expected to intervene? Jayesh answers,

The committee will hopefully be restricted to advise on valuation and issues that crop up during Resolution Process. The committee may be seen as the protection public sector bankers wanted as regards decisions made being subsequently questioned as made on other than merits.

What should be the focus of the committees? According to Jayesh,

While unlikely, it will be of great value if there is a committee which identifies Top 25 names to go after and then is relentless in ensuring that the banks make it happen, and that there is coordination between the banks as well as between the RBI and government.

There have already been a few orders of a couple of High Courts which go against the grain of IBC and it is disappointing that the government did not move the Supreme Court immediately.  Any indulgences by the courts which is not quickly dealt with (including on grounds of so called principles of natural justice) will take IBC down the same path as DRT and SARFAESI.

Read the Ordinance:

banking-ordinance.pdf
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