RBIs new rules on bad loans to make banks more accountable

The Reserve Bank of India (RBI) has recently overhauled the rules governing bank loan defaults in order to curb the menace of burgeoning NPAs of banks. The central bank has scrapped the outdated loan restructuring mechanism which defaulters took advantage of to recycle their outstanding loans. The new rules would help the banks to push the large defaulters into insolvency proceedings, simplify the process of resolution of stressed assets and reduce the amount of bad loans on the books of the banks.

According to the new rules, all banks are required to submit data on non-performing assets(NPAs) to the RBIevery month instead of the earlier quarterly reporting requirement. This would make banks more accountable as they would have to track the bad loans more frequently. The Ministry of Finance too has directed the public sector banks to examine all NPAs of more than Rs 50 crore to ascertain the possibility of fraud, and if a fraud has been committed, then refer such cases to the Central Bureau of Investigation (CBI) for investigation.

Last year (2017), the Modi government had enacted the Insolvency and Bankruptcy Code for time-bound resolution of loan defaults by companies. As per the IBC, each case of loan default was to be resolved within 270 days, and if it was not resolved within the time limit of 270 days, the defaulting companies would go into liquidation. During the process of resolution, the promoters and the company management would be stripped of management control of the company and the same would be vested in the interim resolution professional (IRP) appointed for the purpose.

The RBI and the government appear to be keen on resolving the issue of NPAs of banks by putting in place stricter processes of compliance and enacting stringent laws to protect the lenders and punish the defaulters.