Trigger in Banking Regulation

Arun Jaitley and Urjit Patel

RBI and public sector bank’s failure triggers the Banking Regulation Amendment Bill

By Prabhakar Kulkarni

Common consumers, farmers, small traders and educated unemployed youths need credit facilities and banks are expected to provide them as per the Union and State Government schemes and policy. But while corporate giants who have tremendous influence on the banking sector are getting ample credit facilities and concessions in recovery of dues, the very principle of equity is crushed. Both the RBI and banks failed to maintain the balance with the result that they are almost compelled by the new Amendment to recover the dues by way of liquidation of the assets of the big and willful defaulters.

While the Amendment in the Banking Regulation Act that went through Parliament in Monsoon Session, the ordinance was issued first on 4th May when the Parliament was not in session. The said ordinance and now the bill while stressing the need for the amendment points out  that the stressed assets in the banking system, or non-performing assets have reached unacceptably high levels and hence, urgent measures are required for their speedy resolution to improve the financial health of banking companies for proper economic growth of the country. Therefore, it was considered necessary to make provisions in the Banking Regulation Act, 1949 for authorizing the Reserve Bank of India to issue directions to any banking company or banking companies to effectively use the provisions of the Insolvency and Bankruptcy Code, 2016 for timely resolution of stressed assets.

It was accordingly decided to make amendments to the Banking Regulation Act, 1949.  In order to confer power upon the Central Government for authorizing the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016; to confer power upon the Reserve Bank to issue directions to banking companies for resolution of stressed assets and also allow the Reserve Bank to specify one or more authorities or committees to advise banking companies on resolution accordingly.

The reason why the amendment is needed seems to be the lethargy of the banks to proceed as per the existing laws which are quite strong for recovery of loans. For instance common consumer who fails to pay three installments of his loan is issued notice for recovery and the legal proceedings are processed against him. But in the case of big defaulters and mostly in the corporate sector this provision is not duly followed. The glaring instance is that of the Essar Steel which went to Court the moment the ordinance was issued. This company owes various banks Rs 45000 crores out which Rs 31671 crores turned NPA on 31st March 2016. Why banks failed to act against the company immediately instead of waiting for a year and what action is taken needs to be made public. But in all banking transactions there is a sort of secrecy particularly in regard to sanctioning of loans and also concessions in regard of recovery of dues.

Besides, such companies hire the highest and costly legal brains in the country and proceed in Courts to get the matter stayed. Whether banks fight with appropriate legal acumen or are lenient even when the matter is brought in Court is also a mystery. The big corporate companies are known to use such tactics for avoiding any due legal action.  Essar Steel approached the Gujarat High Court against the ordinance for demanding the stay against the proceeding against it under the Amendment provisions.

While opposing the Essar’s demand, the RBI has pointed out in the court that as on March 2017 the gross NPAs in  India aggregated to more than Rs 728768 crores which is about 12 percent of the total advances, The Essar company one among eleven others with more than Rs 5000 cores each of outstanding loans which need to recover under the insolvency and bankruptcy code.

While rejecting the Essar Company’s plea the HC has observed that the RBI’s directive under the ordinance is not irrational and arbitrary or discriminatory but it would be appropriate for the RBI to provide benefit of all its schemes which need to be equally offered to all without discrimination.

 But what are the facts? The RBI has now come forward to proceed against the twelve defaulting companies without any disclosure as to what the concerned banks have done for the recovery proceedings under the existing laws which are used in the case of small consumers, farmers and small scale industries. In a number of frequent cases of farmers’ and a few small industrialists’ suicides in Maharashtra harassment by banks through their agents has triggered depression and suicides. There are cases wherein even one installment lapse is considered apt for the recovery and banks agents have harassed farm loaners. In both the sanctioning and recovery procedure banks have been discriminatory and more in favor of the big defaulters while harassing the small ones.

The Amendment is therefore is considered imperative as the RBI need more authority and teeth to compel banks to proceed to liquidate the assets of the big defaulting companies and not to be susceptible to their enticement and alluring pressures. The way banks are susceptible is disclosed by statement of the much-publicized Vijay Mallya who has reportedly stated that he has entertained both the banks and media organs who are therefore not likely to harass him for any recovery proceeding.  Now the ordinance needs to be turned into Act and while it is tabled the opposition has demanded that the Bill should be sent to the Parliament’s standing committed for scrutiny.