Amendment in Banking Regulation Act and its Impact

The Union Government has decided to amend the banking regulation act 1949 in order to solve the stressed assets problem which has been plaguing banking sector from many years. Here we have analyzed the whole issue.

Created On: May 24, 2017 15:32 ISTModified On: May 24, 2017 15:34 IST

Banking Regulation OrdinanceThe Union cabinet has decided to amend the Banking Regulation Act to expedite the resolution of the Rs9.64 trillion stressed assets choking the Indian banking system.

The details pertaining to the amendment are still awaited but the markets have welcomed the move with banking stocks gaining as much as 6% when trading opened on the day when amendment became clear

What Is Banking Regulation Act?

The banking regulation act is a set of rules which govern the banking sector in India. This act was legislated in 1949.  It empowers the Reserve Bank of India to license banks and work as a banking regulator in India. Two new sections (viz. 35AA and 35AB) are inserted in the Banking Regulation (Amendment) Ordinance, 2017.

Section 35A of the Banking Regulation Act, 1949, this act enables the Central Government to authorize the Reserve Bank of India (RBI) to direct banking companies to resolve specifically stressed assets by conducting insolvency resolution process, where required.
 This ordinance also empowers the RBI to issue other directions for resolution, and approve or appoint or for appointment, authorities or committees to advise banking companies for stressed asset resolution.

Why there is a need to amend the Act?

Indian bank has been suffering from NPA, Bad loans, and stressed assets problem from many years. This problem has been worsening with the time despite several efforts made by the banks and the government of India.
In the starting stages of the problem, the reasons for this problem were attributed to the so-called policy paralysis with many big projects being stuck because of raw material supply and land acquisition problems.

India economy saw a downturn in last five years this reduced the demand which led to surplus capacity in many industries, thus finally impairing debt servicing capacity.
Before 2008, many banks had been extravagant in lending without adequate checks and safeguards during the boom days leading up to the 2008 financial crisis.
Apart from it, data suggest that Indian public sector banks have a whopping Rs9.64 trillion stressed assets which are strangulating the development and growth in Indian banking sector.

The RBI’s December Financial Stability Report 2016 said that large borrowers (the central bank defines these as debtors to whom lenders have an exposure of at least Rs5 crore) account for 56% of bank debt and 88% of their NPAs.
 In India, the stressed assets or NPA problem is mostly confined to 50 large loan defaulters with the help of this ordinance the RBI can effectively ask banks to sit down with defaulters and reach a settlement as part of the package. Even finance minister Arun Jaitley had mentioned that focusing on 40-50 big corporate borrowers would be enough to solve the crisis quickly. And, according to Credit Suisse estimates, about 40% of debt lies with companies with an interest coverage ratio of less than 1.

Despite a number of schemes launched by the Reserve Bank of India (RBI), this growing stock of toxic debt still continues to elude resolution.
After the amendment, the Centre Government will have a direct impact on the effective resolution of stressed assets, particularly in a consortium or multiple banking arrangements, as the RBI will be empowered to intervene in specific cases of resolution of non-performing assets, to bring them to a definite conclusion.
While falling debt servicing ability is seen across the board, for Indian banks, a quick resolution would mean focusing on large companies.

Impacts of the Amendment

The amendment in the banking regulation act which is being prepared by the government will empower the Reserve Bank of India (RBI) to directly intervene in settling bad loan cases.
After this, the central bank will be able to directly ask banks to sit down with defaulters and reach a settlement as part of the package.
Presently, there is a provision for an oversight committee consisting of “eminent persons under the Scheme for Sustainable Structuring of Stressed Assets (S4A) which is recommended by the Indian Banks’ Association in consultation with RBI.
Under this ordinance, the Section 35 of the Banking Regulation Act, will be amended which currently deals with powers of inspection for RBI.

Now the RBI will prepare a timeline of 6-9 months for banks to deal with their big bad loan accounts.
The scheme will be started off with banks being told to resolve the top 40-50 cases.
Under the amended act or the ordinance, if banks aren’t able to find a solution to the problem by the specified time, the central bank will step in directly.

The RBI will be given some punitive powers to ensure that banks act quickly on these bad loans.
There is a common perception among the banks and investors that the government takes an implicit guarantee to bear the cost of defaults and losses.  The amended act will try to correct that perception.

This new ordinance will also empower The RBI to help bankers overcome concerns about their decisions being probed by vigilance agencies. The new framework will raise the bar for questioning business decisions of the bankers by vigilance authorities but there would be no explicit protection to bankers from the vigilance authorities.


This amendment can be considered a progressive step and gives huge enabling powers to RBI which would play a key role in solving the existing problems related to bad loan and stress assets.  Apart from Amendments to the Banking Regulations Act, amendments to the SARFAESI and Debt Recovery Tribunal Acts, and the enactment of the Insolvency and Bankruptcy Code indicate the Government’s firm determination to find a satisfactory solution to the NPA resolution problem.

The Ordinance amending the Banking Regulation Act will fasten the NPA resolution process by empowering the RBI in giving specific directions to banks. It will also protect bankers from any investigative counterblast in future as the resolution process will have the support of Oversight Committees certified by the RBI.

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