13-Mar-2018: Discontinuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits

On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/LoCs for Trade Credits for imports into India by AD Category –I banks with immediate effect.

Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions contained in Department of Banking Regulation Master Circular dated July 1, 2015 on “Guarantees and Co-acceptances”, as amended from time to time.

Letter of Undertaking is a bank guarantee under which a bank allows its customer to raise money from another Indian bank’s foreign branch in the form of short-term credit. The loan is used to make payment to the customer’s offshore suppliers in foreign currency. The overseas bank usually lends to the importer based on the LoU issued by the importer’s bank.

LoUs are important instruments that allow those in the import trade to transact their business. As an importer in India cannot simply buy dollars and send it abroad to make payments to his supplier, various instruments such as LoUs and Letters of Credit are required to carry out the transaction. LoUs, which are essentially a form of guarantee, have come to be a far cheaper and convenient way for importer to raise credit.

11-Aug-2017:  Rajya Sabha passes Banking Regulation (Amendment) Bill, 2017

Rajya Sabha passed the Banking Regulation (Amendment) Bill, 2017. The Bill replaces the Banking Regulation (Amendment) Ordinance, that was passed in May 2017, after the Budget session of the Parliament.

The Banking Regulation (Amendment) Bill, 2017 was introduced in Lok Sabha by the Minister of Finance, Mr. Arun Jaitley, on July 24, 2017.  It seeks to amend the Banking Regulation Act, 1949 to insert provisions for handling cases related to stressed assets.  Stressed assets are loans where the borrower has defaulted in repayment or where the loan has been restructured (such as by changing the repayment schedule).  It will replace the Banking Regulation (Amendment) Ordinance, 2017.

Initiating insolvency proceedings:  The central government may authorise the Reserve Bank of India (RBI) to issue directions to banks for initiating proceedings in case of a default in loan repayment.  These proceedings would be under the Insolvency and Bankruptcy Code, 2016.

Issuing directions on stressed assets:  The RBI may, from time to time, issue directions to banks for resolution of stressed assets.

Committee to advise banks:  The RBI may specify authorities or committees to advise banks on resolution of stressed assets.  The members on such committees will be appointed or approved by the RBI.

Applicability to State Bank of India: The Bill inserts a provision to state that it will also be applicable to the State Bank of India, its subsidiaries, and Regional Rural Banks.

The Bill basically empowers the Reserve Bank of India (RBI) to give directions to banks to act against loan defaulters. The Bill seeks to amend the Banking Regulation Act, 1949 by inserting provisions for handling cases related to stressed assets. Stressed assets are loans on which the borrower has defaulted or it has been restructured. The RBI may, from time to time, issue directions to banks for resolution of stressed assets. The Central Government can authorise the RBI to issue directions to banks for initiating proceedings in case of a default in loan repayment. These proceedings would be under the Insolvency and Bankruptcy Code, 2016.

The RBI may also form committees to advise banks on the resolution of stressed assets. The members will be appointed or approved by the RBI.

The Banking Regulation (Amendment) Ordinance was promoted on May 4 to address the reportedly high levels of stress faced by the banking sector at the time. The RBI had, in June, identified 12 'defaulters' who account for around 25% of India's non-performing assets (NPA) and informed banks to take up insolvency proceedings against them. A NPA is a loan or advance for which the borrower has failed to repay the principle or interest for a period of 90 days.

Union Finance Minister Arun Jaitley said that the NPAs had begun during the UPA regime and that the sectors that had the most NPAs were Steel, Infrastructure, Power and Textiles. Public sector banks were hit the most as big industrial and infrastructure programmes were supported by them in the hope that there would be further expansion.

24-Jul-2017: Banking Regulation (Amendment) Bill, 2017 was introduced in Lok Sabha.

The Banking Regulation (Amendment) Bill, 2017 was introduced in Lok Sabha by the Minister of Finance, Mr. Arun Jaitley.  It seeks to amend the Banking Regulation Act, 1949 to insert provisions for handling cases related to stressed assets. Stressed assets are loans where the borrower has defaulted in repayment or where the loan has been restructured (such as by changing the repayment schedule).  It will replace the Banking Regulation (Amendment) Ordinance, 2017.

Initiating insolvency proceedings:  The central government may authorise the Reserve Bank of India (RBI) to issue directions to banks for initiating proceedings in case of a default in loan repayment.  These proceedings would be under the Insolvency and Bankruptcy Code, 2016.

Issuing directions on stressed assets:  The RBI may, from time to time, issue directions to banks for resolution of stressed assets.

Committee to advise banks:  The RBI may specify authorities or committees to advise banks on resolution of stressed assets.  The members on such committees will be appointed or approved by the RBI.

Applicability to State Bank of India: The Bill inserts a provision to state that it will also be applicable to the State Bank of India, its subsidiaries, and Regional Rural Banks.

Source: PrsIndia

4-May-2017: Ordinance has been promulgated authorizing RBI to issue directions to any banking company to initiate insolvency resolution process in respect of a default

An Ordinance {Banking Regulation (Amendment) Ordinance, 2017} has been promulgated on 4th May 2017 authorising RBI to issue directions to any banking company to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC). It also enables the Reserve Bank to issue directions with respect to stressed assets and specify one or more authorities or committees with such members as the Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.

The Overseeing Committee (OC) has been brought under the aegis of the Reserve Bank and the membership of the same has been enlarged to five. The reconstituted OC has been mandated to review resolution of cases where the aggregate exposure of the banking sector to the borrowing entity is greater than Rs.500 crore.

An Internal Advisory Committee (IAC) was constituted by Reserve Bank of India, which arrived at an objective, non-discretionary criterion for referring accounts for resolution under IBC. In particular, the IAC recommended for IBC reference of all accounts with fund and non-fund based outstanding amount greater than Rs.5000 crore, with 60% or more classified as non-performing by banks as of March 31, 2016. Accordingly, Reserve Bank of India has issued directions to certain banks for referring 12 accounts, qualifying under the aforesaid criteria, to initiate insolvency process under the Insolvency and Bankruptcy Code, 2016.  As regards the other non-performing accounts which do not qualify under the above criteria, the IAC recommended that banks should finalize a resolution plan within six months. In cases where a viable resolution plan is not agreed upon within six months, banks should be required to file for insolvency proceedings under the IBC.