India’s Central Bank Suggests Tighter Rules to Curb Soured Debt

India’s Central Bank Suggests Tighter Rules to Curb Soured Debt

India’s central bank said lenders may boost borrowing costs for defaulters who aren’t cooperating to help recover soured debt, as it steps up efforts to curb rising bad loans in a slowing economy. Banks should form a panel and set timelines to resolve bad debt, the Reserve Bank of India said in a discussion paper released on its website today. The regulator also proposed higher provisions on such debt if the lenders can’t reach an agreement regarding their recovery or sale.Asset quality at Indian banks is deteriorating as a surge in funding costs hurts the repayment ability of businesses already bearing the brunt of the slowing economic growth. Stressed assets, which include bad and restructured loans, rose to 10.02 percent of total debt, the highest in a decade, as of June 30, central bank data show.

The rise in soured debt is threatening to erode earnings at Indian banks, which are required to set aside more cash as risk provisions against non-performing assets. The RBI predicts India’s economy will expand 5 percent in the 12 months through March 31, the same pace as the last fiscal year, which was the weakest in a decade.

India’s S&P BSE Bankex index, a gauge of 13 banking stocks, slumped 11 percent this year. State Bank of India, the nation’s largest, lost 28 percent and ICICI Bank Ltd. (ICICIBC) fell four percent in the period.

Private equity funds and asset reconstruction companies will be encouraged to buy “stressed companies,” the RBI said, seeking feedback on its proposals by January 1, according to the statement.

To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net

 

India central bank proposes steps to rein in bad loans

11:53am EST

By Swati Pandey

MUMBAI (Reuters) – India’s central bank has proposed rules to help banks recover bad debts, including stricter treatment of delinquent corporate borrowers, in an effort to ease the financial stress on banks as the Indian economy slows.

The Reserve Bank of India (RBI) also proposed reforming how debts are restructured. The changes would help banks to work more closely and make future borrowing expensive for companies that do not cooperate with lenders.

The central bank outlined the proposals in a discussion paper, released on Tuesday, on early recognition of financial distress, prompt steps for resolution and fair recovery for lenders.

Concern over banks’ bad loans has been growing among Indian policymakers in recent months, as economic growth over the past fiscal year subsided to its slowest pace in a decade.

Stressed loans in India – those categorized as bad and restructured – total $100 billion, or about 10 percent of all loans. Fitch Ratings expects that to rise to 15 percent by March 2016.

A large chunk of the bad loans are so-called “willful” defaults, which is symptomatic of what critics say is a loose loan culture. They keep struggling companies in business but crowd out other borrowers and leave taxpayers on the hook to re-capitalize state banks.

In an attempt to curb such cases, RBI on Tuesday proposed transferring the holdings of company founders to a security trustee until the company is turned around, making it easier to change management.

If the founders cannot bring in more money or find a way to repay some of their loans, the lenders would be able to explore bringing other investors into the company.

“It will definitely improve our financial system, the quality of our disclosures and due diligence,” C.V.R. Rajendran, chairman and managing director of state-run Andhra Bank (ADBK.NS: Quote, Profile, Research,Stock Buzz) told Reuters. “A major thing to watch out is change of management control. If that happens it will be a gamechanger.”

The central bank will create a database of directors on the boards of companies classified as “non-cooperative borrowers” for dissemination to lenders, it said.

The RBI also proposed leveraged buyouts for specialized entities to acquire “stressed companies.” It also said sector-specific companies and private equity firms may be allowed to play an active role in the market for stressed assets.

The central bank has invited comments on its discussion paper by Jan 1.