Thursday 2 November 2017

Banking Regulation (Amendment) Bill

The Rajya Sabha has passed the Banking Regulation (Amendment ), Bill. The Bill seeks to replace the Banking Regulation (Amendment) Ordinance , 2017 and amend Banking Regulation Act, 1949. It amends the provisions related to stressed assets.
The Bill empowers the RBI to direct banks to initiate proceedings under the Insolvency and Bankruptcy Code, 2016. RBI’s internal advisory committee has identified 12 large stressed cases for proceedings.
While the humongous problem of NPAs call for a strong institutional framework, there have been questions related to the recent powers vested to RBI on two grounds –
1)      Whether the RBI required such special powers or such powers were already conferred to it under Banking Regulation Act 1949?
2)      Is it advisable to confer RBI with additional powers?

Section 35A of the 1949 Act allowed the RBI to issue binding directions to banks in ‘public interest’ or where the functioning of a bank is detrimental to its interests, among others. The question is whether a high level of NPAs qualifies as ‘public interest’ or ‘detrimental to the interests of the banking company' and therefore allows the RBI to use the powers under Section 35 A to direct banks to initiate recovery of proceedings under Insolvency and Bankruptcy Code.

The opponents of the Bill expressed concerns that focussing on such microeconomic issues might interfere with RBI’s role of framing policies on macroeconomic issues. RBI, as a regulatory institution, is expected to frame broad guidelines, ensure the stability of the banking system and prevent risks to the financial system. As the resolution of stressed assets is a commercial decision so it should be left to the banks. The RBI data shows that about 88 % of the NPAs are in the Public Sector. As the government is the majority shareholder in these banks so it had the authority of initiating proceedings.

The proponents argue that resolving of NPAs is an important task as it has serious repercussions on the economy. It is also argued that RBI’s mandate to initiate proceedings will allay fears of future investigations. The Economic Survey 2016 – 17 mentions that inherent threat of punishments is one of the major reasons due to which bankers delay the decisions of writing off the loans. The new powers will also boost the investor’s confidence.


Though the menace of NPA is because of many factors (giving infrastructure loans, court proceedings on 2G scam and coal allocations, land acquisition etc), it cannot be denied that misgovernance was the major factor. The present bill has enlarged the functions of RBI and it is hoped that more steps are taken in the direction of freeing public sector banks from political interference.

Source : PRS Legislative Research

No comments:

Post a Comment