The President of India recently promulgated an ordinance for amendment to the Banking Regulation Act, 1949. This ordinance that was notified on 5th May, 2017 is considered an important step towards directly addressing the issue of stressed loans that are choking the Banks.
Rs. 9.64 trillion = Total NPAs or bad loans
All banks are governed by the Banking Regulation Act, 1949. The Ordinance will empower the Reserve Bank of India (RBI) to work as a banking regulator. Further, the ordinance will involve amending section 35 of the Act. Presently, the section contains provisions relating to the inspection by the RBI.
The amendment to section 35 has been proposed by way of introduction of sections 35AA and 35AB. These sections will specifically and expressly empower the RBI to issue directions to banks in relation to stressed assets.
Why the ordinance now?
It has been observed that since 2012 the borrowers who borrow funds amounting to Rs. 5 crores and above has steadily increased. Simultaneously, their ability to repay has sharply decreased. Therefore from 2012 the gross non-performing assets increased gradually from Rs. 1.3 trillion to Rs. 9.64 trillion as of May 2017. This is an alarming rise in the nonperforming asset ratio. As a result, banks are struggling to cope with recovery of the same.
The ratio of NPA
Total advances given by Banks determines the financial stability of the Banks. Large borrowers (who borrow Rs. 5 crores and above) form a chunk of such nonperforming debts. They account for almost 90% of Banks NPAs.