Centre plans major banking reforms; SARFAESI Act to be amended

Amendment in Winter Session of Parliament; two models on holding company structure for banks being considered

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Two moves by the government will significantly impact India’s banking segment— a decision to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, during the Winter Session of Parliament to allow banks to take charge of companies that wilfully default on loan repayment and second, a plan to put in place a holding company structure for public sector banks.

The SARFAESI Act empowers banks and financial institutions to recover non-performing assets without the intervention of courts. “Whenever the borrower is deliberately not repaying, a change of management can be done by banks. This is a provision we are going to add to the SARFAESI Act,” G S Sandhu, secretary in the Department of Financial Services, said here on Wednesday.

The Act, in its current form, provides three alternatives to recover non-performing assets — securitisation, asset reconstruction and enforcement of security without the intervention of court. The plan to amend the Act comes at a time when non-performing assets (NPAs) in the banking sector have seen a steep rise. According to RBI data, as of March 31 this year, gross NPAs in the banking system accounted for four per cent of gross advances, while net NPAs accounted for 2.2 per cent.

According to Reserve Bank of India (RBI) norms, a wilful defaulter is one that defaults in payment obligations to lenders even if it has the capacity to pay and doesn’t use the funds for which the loan was availed of, or diverts those. Recently, Kolkata-based United Bank of India had issued a wilful defaulter notice to Vijay Mallya, chief of UB Group and the grounded Kingfisher Airlines.

The airline has, however, challenged the decision in court.

On the holding company structure, Sandhu said while different modes had been proposed, no final decision had been taken. The proposed structure is aimed at meeting banks’ capital requirements.

Sandhu said there were two views on the holding company structure. “One is we should have one holding company for all banks. The second view is we should have a holding company at the bank level, particularly for those that have a large number of subsidiaries such as State Bank of India and Punjab National Bank. So, each bank should have one holding company and above that company, there will be an apex holding company,” he said. “There is also a view about capital requirement — whether you have to provide capital for each level.”

The finance ministry estimates public sector banks will need Rs 2.4 lakh crore of equity capital through the next four years.