Mumbai: The stressed loans resolution package being prepared by the government will empower the Reserve Bank of India (RBI) to directly intervene in settling bad loan cases, two people aware of the matter said.

The central bank can effectively ask banks to sit down with defaulters and reach a settlement as part of the package, aimed at accelerating a resolution of the Rs9.64 trillion in bad loans choking the banking system. The NPA problem is, to a large extent, confined to 50 large loan defaulters.

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This will involve amending Section 35 of the Banking Regulation Act, which currently deals with powers of inspection for RBI. The cabinet has approved an amendment and sent an ordinance to President Pranab Mukherjee for his approval, finance minister Arun Jaitley told reporters on Wednesday without giving details.

RBI will create a timeline of, say, 6-9 months for banks to deal with their big bad loan accounts.

The scheme will kick off with banks being told to resolve the top 40-50 cases, the two people cited above said on condition of anonymity.

If banks aren’t able to find a solution to the problem by the specified time, the central bank will step in directly, said one of the people. This person said RBI will also get some punitive powers to ensure that banks act quickly on these bad loans.

Banks and investors perceive an implicit guarantee on the part of the government and think it will bear the cost of defaults and losses. This scheme will try to correct that perception, said the first person.

RBI will likely exercise control through oversight committees which will have representation from the central bank and help bankers overcome concerns about their decisions being probed by vigilance agencies, said the second person.

Currently, under the so-called Scheme for Sustainable Structuring of Stressed Assets (S4A), there is a provision for an oversight committee consisting of “eminent persons" recommended by the Indian Banks’ Association in consultation with RBI.

One of the functions of the panel under the new framework will be to ensure that the so-called joint lenders’ forums are more comfortable with taking decisions and speeding them up.

“If the regulator can come up with regulations suited to different sectors, unlike the past approach of one-size-fits-all, that would be a good thing," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp. “If the ordinance has something on protecting bankers from fear of investigation, that would be an interesting thing."

While there will likely be nothing in terms of an explicit protection to bankers from vigilance authorities, the new framework will “raise the bar for questioning business decisions", said the first person.

Protection of commercial decisions from vigilance inquiries has been a key demand from bankers, especially after the Central Bureau of Investigation arrested former officials of IDBI Bank Ltd, including a former chairman, for sanctioning loans worth Rs950 crore to Kingfisher Airlines Ltd.

This fear has prevented lenders from sacrificing a part of the amount due to them and push through sales of stressed assets to turnaround specialists and private equity firms.

In any case, such protection would mean amending the Prevention of Corruption Act and not the Banking Regulation Act.

While there is enough flexibility in the RBI Act to do some of these things, the government wants to lay down an enabling provision and show that there is a system-wide shifting of gears, said the first person.

Bankers have also asked for other measures which will give them more comfort, such as allowing amortization of loan losses and structuring repayments over a longer time period. It is not yet clear whether these will be part of the resolution framework.

However, said the first person, there will be absolutely no forbearance—the practice of recognizing restructured loans as standard assets and kicking the can down the road. RBI will insist that banks continue to provide adequately, this person added.

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