New Delhi/Mumbai: The cabinet on Wednesday decided to amend the Banking Regulation Act to put in place a scheme to resolve stressed assets in the banking system totalling about Rs9.64 trillion as of end- December and enable this capital to be redeployed productively in the economy.

A proposal to amend the Bill has been sent to President Pranab Mukherjee, who is expected to sign an ordinance to that effect shortly, perhaps as early as Wednesday night, a person with knowledge of the development said on condition of anonymity.

Finance minister Arun Jaitley, who briefed reporters about the decision taken at a cabinet meeting chaired by Prime Minister Narendra Modi, said an important decision related to the banking sector was taken but details could not be made public before the President approves the proposal.

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“There is a convention that when some proposal is referred to the President, then details of it cannot be disclosed till it is approved. As soon as approval comes, details will be shared," the minister said.

The person cited above said the proposed amendments seek to empower banks to resolve large non-performing assets (NPAs) and protect them for loan decisions taken in good faith.

The scheme does not involve setting up a ‘bad bank’ , as recommended by chief economic advisor Arvind Subramanian in the Economic Survey in January, another person briefed about the development said on condition of anonymity.

Early results for the March quarter show that the problem of bad debts has only grown worse since December with big lenders such as ICICI Bank Ltd and Axis Bank Ltd reporting an increase in their gross non-performing loans.

In the last three years, the Reserve Bank of India (RBI) has come out with several schemes to resolve the bad loan problem such as strategic debt restructuring (which allows banks to convert part of their debt in a stressed company to 51% equity, allowing them to take operational control) and scheme for sustainable structuring of stressed assets, or S4A (where banks can break up the debt into sustainable and unsustainable halves, allowing deep restructuring in the latter, while the former continues to be serviced).

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But many of these schemes have rigid rules or high entry barriers and do not provide lenders with enough flexibility, bankers complain. Bad-loan resolution has also proved elusive because bankers are reluctant to sacrifice a part of the loan or initiate a one-time settlement process for fear of provoking inquiries by investigative agencies. The government has also put in place an Insolvency and Bankruptcy Board of India (IBBI) to help turn around or to monetise stressed assets.

“The bankruptcy code will help in preventing future generation of stressed assets. It may not be of much use in dealing with the bulk of current non performing loans as they may need liquidation or other flexible solutions more than resolution (restructure)," said Sumant Batra, insolvency expert and managing partner of law firm Kesar Dass B. & Associates. “Banks which are unlikely to approach IBBI for resolving most of their existing NPAs need an alternate mechanism that is efficient and cost effective."

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