On Friday, an ordinance to further amend the Banking Regulation Act came into force after President Pranab Mukherji gave his assent that gave more powers to the Reserve Bank of India (RBI) in bringing in efficient resolution to Indian banking industry's bad loans problem.

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As per the new rules, under Section 35AA - the central bank is entitled to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default under the provisions of the Insolvency and Bankruptcy Code.

Another reform was made in Section 35AB where the central bank from time to time, issue directions to the banking companies for resolution of stressed assets. 

Fitch Ratings recently said, “RBI will not be able to address problems in the banking sector on its own. Significant efforts to resolve bad loans, for example, would leave banks in need of recapitalisation, given that haircuts and increased provisions would be required. State banks are generally in a poor position to raise new capital, which makes them largely reliant on the government for recapitalisation.” 

Similarly, Care said, “Successful schemes for overcoming the bad loan problem include two key components: i) timely recognition of bad assets and creation of incentives for banks to get rid of such assets at the earliest ii) Recapitalization of banks.”

In terms of sale of stressed assets, Care said, "The main difficulty of this approach is pricing of the bad assets, i.e., too low price will cause additional recapitalization requirement and high pricing will mean higher allocation of public funds towards bad loans."

Arundhati Bhattacharya, Chairman, SBI said, "The country and its banking system needs to move quickly and decisively to take benefits of these enabling provisions."