New ordinance to give sweeping powers to RBI to resolve bad loans

An ordinance to amend the Banking Regulation Act will give the Reserve Bank of India unprecedented powers to take decisions on resolution of individuals bad loan cases and the development augurs well for the banking industry as a whole.

The ordinance was cleared by the cabinet on Wednesday, which was approved by the President on Friday morning.

The new ordinance in the Banking Regulation Act clearly say , "The Central Government may by order authorise the RBI to issue direction to any banking company to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016."

The ordinance further allows RBI to issue directions to banking companies for resolution of stressed assets, from time to time.

The ordinance comes at an opportune time as the NPA problem has become a huge challenge for the stability of the economy itself. The ordinance sends a strong message as some action was warranted to resolve the issue.

More clarity may be required in understanding the exact role of the RBI in the resolution of the NPA issue. However, the process of NPA resolution will pick up pace once the ordinance comes into effect. The detailed framework on the ordinance is still awaited from the RBI and this may answer lot of questions on the steps ahead that need to be taken to resolve the issue.

The ordinance envisages formation of a committee to take decisions on stressed assets. The ordinance thus allows the banks to take commercial calls and thus is a positive development.

The fact of the matter is that the economy needs to grow and the business activity and sentiments need to improve. Once that happens, the non-performing assets automatically start performing and the recovery will also quicken.