Government of India amends Banking Regulation Act, 1949; authorises RBI to tackle bad loans

The Government of India (GOI) amended the Banking Regulation Act, 1949 (Act) vide a notification in the Official Gazette on 4 May 2017 by means of a presidential ordinance (Amendment Ordinance). The Amendment Ordinance has given the Reserve Bank of India (RBI) powers to tackle bad loans by issuing directions to any banking company to initiate insolvency proceedings for any default in debts, and also for issuing directions to banking companies for resolution of stressed assets.

As a background to the Amendment Ordinance, in the past few years, India witnessed a slew of borrowings by corporate entities and individuals being declared as bad loans by various banks, including public sector banks, on account of their non-payment and/ or default.

The Amendment Ordinance has inserted the following two additional sections in the Act giving the RBI the mandate to tackle the bad loans issue effectively:

1. Section 35AA: This section now provides that the GOI may by an order in writing authorise the RBI to issue directions to any banking company to initiate insolvency resolution process(es) in respect of a default. The term ‘default’ has been given the same meaning as under the Insolvency and Bankruptcy Code, 2016, i.e. non-payment of a debt when the whole or any part or instalment of the amount of debt has become due and payable, and when the same is not repaid by the debtor or the corporate debtor, as the case may be; and

2. Section 35AB: The RBI may, without prejudice to section 35A of the Act, which deals with the powers of the RBI under the Act to give directions, issue directions from time to time to banking companies for resolution of stressed assets. The RBI may also specify one or more authorities or committees to advise banking companies on resolution of stressed assets, with such members as may be appointed or approved by the RBI.

The Amendment Ordinance as published in the Official Gazette may be accessed at the following link: