The Union Cabinet on Wednesday cleared an ordinance to empower the Reserve Bank of India (RBI) to reduce bad debts of public sector banks. The non-performing assets (NPAs) of the banking system is expected to touch an alarming Rs 9 lakh crore (trillion) in March 2017 once all banks come out with their quarterly results, which are currently underway.

The ordinance is aimed at amending the Banking Regulation Act to resolve the NPA crisis by giving powers to the central to auction off bad loans. The ordinance may also have a one-time settlement scheme, including the amount of haircut (cut in interest payments and receive less than what is owed) the banks will take, if bad loans are to be sold through auctions.

Finance Minister Arun Jaitley refused to share details of the ordinance in the press briefing until the President signs it. A public announcement is expected on Thursday.

Sources said the ordinance will empower the RBI to auction the properties to recover the loans blocked in NPAs or create a separate Bad Bank to buy all stressed assets from banks to restructure them.

Public sector banks were demanding a two-member oversight committees to monitor the bad loan resolution process so that their decisions are not called to question later. Decision making particularly among public sector bankers had come to a standstill after the arrest of three IDBI Bank officials long after they retired for sanctioning an unsecured loan to Kingisher Airlines about 9 years ago.

"The amendments will empower the RBI to give faster approvals of loan restructuring and other related decisions taken through various mediums including the joint lenders forum," an official said.

The government is particularly concerned about the power, steel, shipping and the textiles sector which take up about Rs 10 lakh crore of bank credit," a banker said. Of the Rs 5 lakh crore loans to the power sector, about Rs 1.6 lakh crore are stressed.

The government's concern is that the money lent by the banks is not coming back and that has impacted their capacity to disburse credit, adversely impacting investments in India.

It is believed that the new law will also empower RBI to set up oversight panels that will shield bankers from later action by probe agencies looking into loan recasts.

Bankers have made a number of representations to both RBI and the government allow banks to give large corporate defaulters to get bigger haircuts and a longer term to repay their debt so some of the units specially in the power and steel sectors to be revived. They believe unless there is a deep restructuring offered it will be difficult to revive the units that are already set up in the country. Specifically they have been asking for larger portion of the debt can be converted to equity and the restructuring can run till 80 per cent of the project is revived and not be bound by a 7-year tenure of the CDR mechanism which bankers say is an inhibiting clause. Under CDR only 10 per cent of the debt can be converted into equity.

Official figures suggest that bad loans rose by over Rs 1 lakh crore in the first nine months of last fiscal to Rs 6.07 lakh crore by December 31, 2016. Public sector banks' gross bad loans stood at Rs 5.02 lakh crore at the end of March 2016, up from Rs 2.67 lakh crore at the end of March 2015.