Ordinance to tackle bad loans worth Rs 6 lakh crore cleared

Centre to handover three ITDC hotels to state governments; steel policy gets nod

The Union Cabinet, led by Prime Minister Narendra Modi, on Wednesday approved a new framework for dealing with Rs 6 lakh crore worth of non-performing assets (NPAs) in the banking system. 

The framework includes the promulgation of an Ordinance to amend the Banking Regulation Act to give more teeth to the Reserve Bank of India (RBI) and its oversight committees to act on behalf of banks while deciding on NPAs. The proposals are now awaiting the President’s assent.

“We have taken some decisions regarding the banking sector. There are some modifications for which the President’s assent is required,” Finance Minister Arun Jaitley said at a post-cabinet press briefing. “There is a convention that when some proposal is referred to the President, then details of it cannot be disclosed till it is approved. As soon as approval comes, details will be shared,” he added. 

The Cabinet also approved a National Steel Policy that aims to give preference to domestically manufactured iron and steel products for government’s infrastructure projects, a move that would boost the sales of debt-laden companies. 

It also decided to hand over three ITDC Hotels located in Madhya Pradesh, Assam, and Rajasthan to the respective state governments after the Centre gives up its stake in them. The properties will be redeveloped and used in accordance with the state governments’ requirements. 

In the case of Bhopal and Guwahati, the India Tourism Development Corporation (ITDC) will be divesting its share of 51 per cent in the joint venture company formed for operating the hotels. The Bharatpur hotel, which the corporation is only managing, will be returned to the state government.

On the decisions regarding NPAs, a top government official said the Banking Regulation Act would be amended through an Ordinance, which was why the framework had been sent to the President.

Sources told Business Standard that the amendments could give the RBI an explicit mandate to intervene on behalf of state-owned banks when deciding on how to deal with NPAs.

Analysts say that while nothing prevents the banking regulator from intervening and approving decisions regarding NPAs by banks, there is no enabling provision.

The Ordinance will set in motion a process under which the RBI and its oversight committees will have a greater say in how toxic assets are dealt with. The framework also envisages amendments to the Prevention of Corruption Act (PCA). The PCA amendments will allow commercially viable decisions by banks which are later not scrutinised by probe agencies. Both the amendments are possible in the monsoon session of Parliament, Business Standard has learnt.

The new framework envisages setting up multiple oversight committees under the aegis of the RBI to monitor progress of the top 35-40 NPAs in value terms, which constitute 60 per cent of all NPAs. These committees could get an enhanced mandate to help the lenders with their decision-making, including overseeing of joint lenders forums (JLFs), a consortium of bankers dealing with a particular project. They may also be able to decide on matters such as which bank will take how much ‘haircut’ and to intervene if the JLF reaches a deadlock, said an official.

The framework will also enable a JLF to deal more effectively with NPAs by possibly tweaking the current guidelines and reduce the threshold in terms of exposure as well as the number of banks within a JLF for taking a decision on NPAs.

According to current rules, decisions regarding a bad loan or toxic assets are binding on all lenders in a JLF, if they are approved by 75 per cent in terms of exposure or 60 per cent in terms of absolute numbers. However, these thresholds are being seen as too high and hence there could be a change in regulations to enable JLFs to decide on NPAs based on a simple majority.

Banks which are a part of a consortium face problems due to disagreements among them on projects gone bad. To address that issue, the Centre is expected to bring an enabling provision under which, once a simple majority of the banks, based on their exposure to the bad loan, takes a decision, it will be binding on other banks who are part of the group. The new exposure level to be set is likely to be lower than the current 75 per cent. The Cabinet also cleared a new pension package for armed services. Soldiers, sailors and airmen of the three defence services will hereafter be paid salaries recommended by the 7th Central Pay Commission (7th CPC). The new scales will be paid with effect from January 1, 2016.

(With inputs from Ajai Shukla, Megha Manchanda and Sanjeeb Mukherjee)