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Amendment in Banking Regulation Act and its Impact Research Team | Posted On Wednesday, March 04,2020, 11:48 AM

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Amendment in Banking Regulation Act and its Impact



The banking regulation act dates back to the year 1949 and contains certain rules and regulations that do not fit aptly in the current banking system. There were some blank spaces that need guidance and the right direction to ensure transparency and workability in the system. The primary objective of introducing these amendments was to free the banking system from the burden of stressed assets.

With the introduction of the 2017 amendment, the RBI has been given the power to leverage the banks from the big loan defaulters ultimately leading to a bottleneck in the system. The bill was passed in the May 2017 Rajya Sabha session and seeks to replace the Banking Regulation (Amendment) Ordinance on the parliamentary budget announcement.

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Amendment in Banking Regulation Act and its Impact

What is The Gist of the Bill?

The gist of the bill lies in empowering the Reserve Bank of India to deal with stressed assets that create a bottleneck in the system. The targeted assets are defaulting loans that choke the cash flow in the banking system. The 1949 banking act has been amended under the 2017 bill that permits the Reserve Bank of India to handle provisions related to the borrower default cases.

See Also: Banking Regulation Act 1949 and Important Sections: All You Need To Know

Why Was The Amendment Needed?

The Indian banking system has been suffering from stressed assets which are not restricted to unpaid loans or defaults alone. This is basically a circle of plagued assets like Bad loans, NPAs along with stressed` assets.

The 2008 global financial crisis was an eye opener for the Financial Markets in India. The banks were comfortable in lending to customers without a thorough background check and this led to serious credibility issues. It is estimated that a humongous Rs 9.64 trillion was stuck under stressed assets.

There was no way out in the past to work out the situation which primarily involved 50 major defaulters including some banks as well. The newly introduced amendment allows RBI to instruct lending banks to sit and work out ways with the borrowers so that not everything is stuck midway.

What are The Stressed Assets?

Stressed assets refer to the loans that are unpaid or the borrower defaults in making the payment of the loan. Another case is when the loan has been restructured in regard to any changes in the repayment schedule.

See Also: Penalties Prescribed Under The Banking Regulation Act 1949

What is The Change or Amendment?

Section 35AA and 35AB have been introduced in the existing Banking Regulation Act, 1949. The section 35AA enables the RBI to issue directions vis-a-vis loan defaults and to order initiation of an insolvency case for the same. Section 35AB empowers RBI to directly intervene in case of stressed assets.

What is The Impact of The Amendment?

The newly introduced amendment has leveraged the stressed assets burden from the financial system to quite a level. This will allow the RBI to directly deal and intervene in such matters. This will help in settling the bad loan cases that were choking the system.

The RBI is now in a position to mediate such settlement meetings between the affected and involved parties and close the case. RBI inspection powers have also been amended under the scheme for sustainable structuring of stressed assets (S4A) as recommended by the Indian Bank’s Association in consultation with the RBI.

Under the new amendment, the RBI can ask banks to settle and close the case within a timeline of 6 to 9 months as per requirements. Each bank has been asked to close a minimum of 40 to 50 cases that are among the topmost defaulters.

See Also: The Regulations That Govern Banking in India

The RBI has complete rights to intervene in the case if the banks are unable to reach a solution. There are some punitive powers as well that the central bank will exercise to ensure timely completion of the settlement process.

The general perception among people stating that the central bank is going to bear all the costs and charges of the defaults and losses will also be rectified and corrected under the newly introduced amendment.

The bankers have been complaining on prospective interrogation by the vigilance committees. The central bank has taken care of this concern as well by setting higher standards for the questions to be asked from bankers. However, the central bank doesn’t guarantee 100% protection of the bankers from an investigation.

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