Banking ordinance: Sound step or halfway measure?

The Banking Regulation (Amendment) Ordinance, 2017, was promulgated on 4 May to amend the Banking Regulation Act to give the Reserve Bank of India (RBI) powers to direct banks to refer certain borrowers into bankruptcy resolution under the Insolvency and Bankruptcy Code, 2016 (IBC). This step follows the failure of numerous efforts by the government to raise India’s sovereign credit rating. Coupled with the rolling out of the goods and services tax, this is another step to burnish the government’s reformist credentials and to show domestic and foreign investors that “it means business”.

Declaring that the ordinance was necessitated by the “unacceptably high levels” of stressed assets in the Indian banking system, preamble to the ordinance suggested that the mechanism introduced would enable the use of the IBC to resolve stressed assets while balancing the interests of all stakeholders.

The ordinance inserts new sections 35A and 35AA in the Banking Regulation Act. Section 35A enables the RBI to specify committees with members appointed or approved by the RBI to advise banks on resolution of stressed assets. Section 35AA enables the central government to authorize the RBI to issue directions to any bank to commence proceedings under the IBC. Pursuant to section 35AA, the government issued an order on 5 May authorizing the RBI to issue directions to banks to initiate resolution under the IBC.

Sawant Singh, Aditya Bhargava and Sriram Ramachandran are partners at the Mumbai office of Phoenix Legal.