RBI to clean up $180bn of soured loans from banks

Bloomberg

India’s financial regulator will gain new powers to order banks to clean up as much as $180 billion of soured loans on their balance sheets, which has been choking credit and weighing on growth.
With the new rules bolstering its regulatory authority, Reserve Bank of India, is seeking to resolve the country’s 60 largest delinquent-loan cases in about nine months, a person familiar with the matter said. The central bank is also planning to set up a secretariat to oversee the resolution process and will unveil details in two weeks, the person said, asking not to be identified as the information isn’t public.
Various programs proposed by the central bank to resolve the bad-loan problem have been unsuccessful so far, with lenders reluctant to write down assets sufficiently and company owners unwilling to negotiate repayment plans. That’s hindered credit growth and job creation in Asia’s third-largest economy.
“India’s stressed asset scenario is a tough one to resolve and the rule changes announced by government are another small step in right direction,” Madan Sabnavis, chief economist at Credit Analysis & Research Ltd., said on the phone. “This will empower RBI in giving time-bound instructions, which would have to be met by the banks in terms of cleaning up their books.”
The amendment to the Banking Regulation Act, which came into effect on Thursday, will enable the RBI to order lenders to initiate insolvency proceedings against defaulters and to create committees to advise banks on recovering non-performing loans, according to a statement on the Gazette of India website. Stressed assets in the banking system have reached “unacceptably high levels” requiring urgent measures to resolve them, the nation’s government said.
“There is a list of stressed assets that RBI is already looking at,” Finance Minister Arun Jaitley told reporters in New Delhi. The banking regulator “was required to be empowered on specific non-performing assets. RBI and government will continue to work together in expeditious resolution of the problem.”
Stressed assets — bad loans, restructured debt and advances to companies that can’t meet servicing requirements — have risen to about 17% of total loans, the highest level among major economies, data
compiled by government shows.
While government figures peg soured debt at $180 billion, a senior partner and managing director at Apollo Global Management in India, in March said the the figure maybe about $300 billion as almost half of the top 1,000 companies have
unsustainable levels of debt.
Setting up of “oversight committees,” or panels, that will decide on the amount of write downs lenders will need to take, will help bankers reduce the risk of investigations by anti-graft agencies, a senior official at Lakshmi Vilas Bank Ltd said.
“The oversight committee is a good thing as the hangover or fear of” a probe will be addressed, said Mukherjee in a phone interview. “This committee will be seen as an independent and authoritative one.”