Set out below is a short update on the Banking Regulation (Amendment) Ordinance, 2017 issued by the Government of India yesterday (Ordinance) inter alia empowering the Reserve Bank of India (RBI) to intervene and issue directions to banks for resolution of stressed assets. The Government has promulgated the Ordinance with immediate effect, instead of waiting for an enactment to be passed by Parliament, which could at the earliest, have been possible only in the next parliamentary session in July 2017.
The Ordinance introduces two new sections in the Banking Regulation Act, 1949: Section 35AA and Section 35AB, which empower RBI to intervene in the resolution of stressed assets. These measures are as follows:
- the RBI may direct banks to commence the insolvency resolution process, against defaulting borrowers, under the Insolvency and Bankruptcy Code, 2016 (Bankruptcy Code);
- the RBI may give any directions it wishes to banks for resolving stressed assets; and
- the RBI may set up one or more advisory / supervisory committees to advise banks on resolving stressed assets.
- Shaking the status quo: The RBI Guidelines on Sale of Stressed Assets issued in September 2016 did not have the desired impact. Despite the risk of higher provisioning, banks were not willing to undertake deep surgery or offer higher discounting on stressed assets. Further, neither the strategic debt restructuring scheme nor the scheme for sustainable structuring of stressed assets of the RBI have had the desired effect.
Vide this Ordinance, the Central Government through RBI has retained the ability to “parachute” into the form of a decision maker for the lender in respect of stressed assets, as opposed to its current avatar as a regulator. Since any resolution directions by the RBI could result in significant write-offs by banks, it is expected that this will force the banks’ management teams to look for quick and meaningful stressed asset resolution mechanisms on their own. For banks which are toeing the line to proactively resolve stressed situations (either by themselves or at the RBI’s directions), there is a silver lining presented that the RBI in exercise of its powers may relax provisioning norms or unburden other regulatory load.
- Statutory validation of restructuring calls: Where banks act to resolve stressed situations on the advice of the committee constituted by the RBI, for instance, making available further working capital to revive the business of a defaulting borrower, collateral sales to an identified bidder at discount to book, higher mortarium periods, haircuts, etc. – such decisions could be entitled to a “safe harbour”, and also present banks with the ability to run through decisions past the committee, thereby creating a safe decision making environment.
- No clarity on the immediate impact of the Ordinance: Much will now depend on how the RBI wishes to exercises its new found powers, and in particular, how it can simplify its own decision making under the Ordinance. A few instances as food for thought:
- Will the RBI committee effectively only “rubberstamp” the decisions / roadmaps presented by the bank management, or will they also offer a solution to a particular stressed asset? It may be far-fetched to expect a committee to decide the fate of a delinquent borrower, as the bank management is likely to be the best judge of what may be workable in the given circumstances.
- Will the RBI be allowed to use these powers to steam-roll banks which are opposing account specific restructuring / resolution plans to fall in line e.g. force the hand of hold-out banks without whose assent a corporate insolvency resolution plan cannot be approved under the Bankruptcy Code (as the Bankruptcy Code requires 75% creditor assent by value)? It is pertinent to note here that there have been several instances in the recent past where international and private sector banks operating in India have refused to cooperate with Indian state owned banks in implementing their restructuring packages. Since the Ordinance does not distinguish between Indian banks and international banks operating in India and applies equally to all banks with a branch in India, the Ordinance is a welcome move so far as achieving successful resolution under the Code is concerned.
- In what situations will the RBI direct banks to commence the insolvency resolution process under the Bankruptcy Code? The Ordinance currently contemplates an ad-hoc exercise of such powers by the RBI - there is still some dust to settle on how this will operate, since as per the Ordinance, this “nuclear button” can only be pressed after the RBI has been authorized by the Central Government.
Other High-level Takeaways
- While the Ordinance carries force of law, it will still need to be validated when both houses of the Parliament meet in their next session. This is not likely to be a challenge in the present circumstances of high stress in the banking system and larger political consensus around its resolution.
- The Ordinance looks to give sweeping powers to the RBI in stressed asset situations, and replace the judgment/ decision making of bank management, with that of its own. If implemented with the same stealth and efficiency with which it has been promulgated, and to the extent bank management teams (especially the state-owned banks) are able to find common ground in the manner in which the Ordinance can be used for their benefit, we believe that the Ordinance will pave the way for:
- Faster resolution of stressed situations through joint action;
- An increased willingness of banks to utilize the Bankruptcy Code;
- Decision on merits rather than concerns on bank profitability in the short term; and
- Where “blessed” by the RBI constituted committee, give banks more flexibility to innovate with rescue/refinancing packages.
- While the proposed measures are expected to speed up decision making on resolution of stressed assets, the RBI will also have to consider revising prudential norms to incentivise banks to take faster decisions without being over-concerned about erosion of capital and other related consequences.