India eases bad-debt resolution rules

Bloomberg

The Reserve Bank of India (RBI) eased rules to give lenders laden with bad debt more time to resolve delinquent accounts and lifted a deadline for pushing defaulters into bankruptcy courts.
The directive, which also covers shadow banks, gives lenders 30 days to review a delinquent account and a further 180 days to implement a resolution plan, loosening the previous timeline. Lenders must make additional provisions if there are delays in executing the plan, the central bank said.
India’s Supreme Court in April overruled an RBI directive mandating a timeline for recasting delinquent accounts, which asked banks to seek loan resolutions if borrowers defaulted by a single day and move them to bankruptcy court if restructurings weren’t concluded in 180 days. Industry bodies for power-generating companies, shipyards and sugar mills challenged the
directive.
“The new guidelines provide a system of strong disincentives in the form of additional provisioning for delay in initiation of resolution or insolvency proceedings,” RBI Governor Shaktikanta Das said in a speech. “The new framework makes inter-creditor agreements man- datory and provides for a majority decision to prevail.”
“This is a good step to calm the market down. It also gives leeway to banks to make as much effort as they can to avoid insolvency proceedings,” said Chitranshul Sinha, a partner at Dua Associates, where he focusses on bankruptcy laws. “It also provides promoters an opportunity to salvage their business.”
The measures further unwind the discipline that previous governors had sought to introduce to clean up a banking system saddled with the world’s worst non-performing loan ratio. Das has relaxed lending rules for some weak state-run banks and allowed the restructuring of loans to small businesses to drive credit and economic growth.
The rules, which take effect immediately, give lenders discretion in how loan defaults are addressed. Banks will need to make additional provisions for as much as 35 percent of the outstanding amount if they miss the deadline for implementing resolution plans.
The regulator retained the right to issue directives to initiate bankruptcy proceedings against borrowers for specific defaults to maintain the pace of resolutions.
“It is expected that the current circular will sustain the improvements in credit culture that have been ushered in by the efforts of the government and the Reserve Bank of India so far,” the central bank said in its statement.

RBI stops short of specific steps to aid shadow banks
Bloomberg

India’s central bank said it’s prepared to come to the help of the troubled shadow banking sector if needed, but stopped short of announcing specific action to help the country’s non-bank financial companies. Speaking soon after announcing a cut in interest rates to the lowest in nine years, Reserve Bank of India Governor Shaktikanta Das told a press conference that the central bank is closely monitoring the NBFC sector and is ready to take “whatever steps are required” to ensure financial stability.
Some analysts had expected more decisive action to be announced together with the RBI’s statement. “The market was expecting some steps to ease the liquidity crunch in NBFCs, and to that extent the policy was bit negative,” said Siddharth Purohit, a banking analyst at SMC Global Securities. Further NBFC defaults will force Indian banks to
increase their bad loan provisions, he added.
India’s shadow lenders have been under pressure since last year, when a series of defaults by Infrastructure Leasing & Financial Services forced the government to intervene and exposed weaknesses in the sector. The situation has worsened this week after Dewan Housing Finance Corp.’s rating was cut to default by Standard & Poor’s local arm after it delayed payments on bonds due on June 4.
The RBI said it will form a committee to review its liquidity management framework, to simplify the current guidelines and communicate its objectives more clearly.