We are 1!

Our legal fortnightly has completed its maiden year online.

The idea of sharing valuable knowledge in the niche areas of Corporate Law, FEMA and SEBI culminated in the birth of the online legal fortnightly – “The Law Tree” when the first edition went online in April 2016.

We thank you for your support and encouragement. Looking forward to your continued patronage.

  • – The Law Tree Team


Banks to NPA’s: “Back-off… We are Stressed!”

Insights – Banks to NPA’s: “Back-off… We are Stressed!”

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.

Advances given by Banks are called assets. They generate income for banks by way of instalments and interest. If the instalment is not paid within due date, it becomes a bad loan. When default goes beyond 90 days after due date, it becomes an NPA.

Government data published in June 2016 shows that power, steel, metal and metal products sectors are the worst performing industries as far as repaying debt is concerned. More than one third of the metal industry’s outstanding advances from banks became NPAs.

Nationalised banks and public sector banks have gotten crushed under this debt pile.  This could be attributed to the statutory regulations and the economic crisis on and after 2008. It also seemed to have dented the debt servicing capability of the corporate houses. Many big corporate houses were declared wilful defaulters and action initiated. It is a fact that around 50 large corporate borrowers contribute to maximum NPAs and tackling them would be sufficient to solve this crisis quickly. The arrest of top officials of a bank has further heightened tension in the banking circles further made them deal with NPAs and corporate houses in a cautious manner. This is more so the case where consortium lending is involved here a group of banks are involved.

Insights – Banks to NPA’s: “Back-off… We are Stressed!”

What the ordinance will do

By amending section 35 of the Banking Regulation Act, 1949 the government proposes to empower RBI to:

  1. Direct banks to resolve specific stressed assets by initiating insolvency resolution process under the Insolvency and Bankruptcy code (IBC), where required.
  2. On its own accord issue directions to banks for resolution of stressed assets.
  3. Issue other directions for resolution, and appoint or approve for appointment, authorities or committees to advise banking companies for stressed asset resolution.

The Impact

The ordinance for amendment to the Banking Regulation Act, 1949 by enabling the RBI and banks to deal directly with borrowers will have a major positive impact in effective resolution of stressed assets, particularly in consortium or multiple banking arrangements as the RBI will be empowered to intervene in specific cases of resolution of non-performing assets to resolve the issue to beneficial interests of both the lenders borrowers. To this end, the central government proposes to utilise the recently enacted Insolvency and Bankruptcy Code (IBC), 2016 effectively and judiciously. A comprehensive approach is being adopted for effective implementation of various schemes for timely resolution of stressed assets.


Circulars & Notifications



When you change the way you look at things, the things you look at change

Abraham Hicks