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Loan defaulters beware! Modi govt notifies new Banking Regulation Act

The Modi government on Friday notified the ordinance to amend the Banking Regulation Act, empowering the Reserve Bank of India (RBI) and banks to initiate bankruptcy proceedings against chronic defaulters.
“The Central Government may by order authorise the Reserve Bank to issue directions 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 gazette notification said.
On Wednesday, the Union Cabinet approved an ordinance allowing RBI to deal with bad loans on a case-to-case basis as opposed to following a set of broad guidelines and rules for all non-performing assets (NPAs).
The amended section 35 An of the Banking Regulation Act will allow RBI, “from time to time,” to issue directions to the banking companies for resolution of stressed assets.
“The RBI may specify one or more authorities or committees to advise banking companies on a resolution of stressed assets,” the notification said.
India’s banks have been beset with non-performing assets (NPAs), loans that have turned bad. Total NPAs at the end of December 31, 2016, is estimated to have crossed Rs 7 lakh crore.
The RBI and the government had also asked banks to impose a strict ban on any new loans to wilful defaulters. Such borrowers are also now barred from being appointed as directors on boards of companies.
The government said the bad loans have reached “unacceptably high levels” and “urgent measures are required for their resolution”.
The notification said the new insolvency law can be effectively used for the “resolution of stressed assets by empowering the banking regulator to issue directions in specific cases”.
The new law may also thus empower banks to force lingering corporate loan defaulters to forego ownership and voting rights in their companies, allowing lenders to induct new management leadership mandated to turnaround these entities within a specified time frame.
The fresh set of rules may also allow banks to separate the outstanding unpaid debt into sustainable and unsustainable parts to better restructure loans.
Banking industry sources said that the government has collated details on bad loans worth nearly Rs 50,000 crore that need immediate action against promoters and directors of chronic defaulters.
The new law will also legally ring-fence bankers from scrutiny from investigating agencies, which many bankers say often restrict lenders to go after chronic defaulters.
The top wilful defaulters' list prepared by the government and banks includes a string of diamond traders, two now-grounded full-service airlines, a media house with operations across the country, a multi-state agricultural cooperative, mining companies, realty developers, garment brands, and several individual proprietors.
These "Wilful defaulters" have not repaid bank loans despite having the capacity to do so. Some of these have been found to have diverted funds to projects other than those for which the loan was availed, while some others have been found to have sold off assets that were pledged to get loans without knowledge of the banks.
Willful defaults are the worst kind of bad loans that empowers banks to get after the promoters and directors by even naming and shaming them through public notices and advertisements for not paying up on loans, which banks believe that they have the ability to honour.
Former RBI governor Raghuram Rajan had set banks a March 2017 deadline to clean up their balance sheets.
Mounting bad loans and high default rates by large companies have drawn criticism from experts and regulators.

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