India gives central bank muscle to act on debt

INDIA tweaked its laws on Friday to help tackle a record $150-billion in troubled-banks debt, giving its central bank greater power to identify and enforce resolution on specific soured loans.

In an executive order that alters the Banking Regulation Act, the government authorised the Reserve Bank of India (RBI) to direct banks to initiate an insolvency-resolution process in the case of a default under provisions of the bankruptcy code.

The ordinance, which takes effect immediately, also says the central bank may specify one or more authorities or panels to advise banks on resolution of stressed assets.

“The object of this act is that the present status quo can’t continue and the present status quo is that not much was moving,” Finance Minister Arun Jaitley told reporters. The move is the latest attempt to tackle the record 9.64-trillion rupees (R2.02-trillion) in stressed loans accumulated by end-December that have choked new credit and hit economic growth.

“The ordinance is a welcome step, but there is a long road ahead. Until the capital actually comes in, things are likely to remain a bit difficult,” said Tirthankar Patnaik, Mizuho Bank’s India strategist.

Including “unrecognised” problem loans, total stressed debt in the system could be as high as $191-billion, or 16.6%, of total loans on September 30 last year, the finance ministry estimated.

Jaitley said other steps were also in the works to tackle bad debt and they would be communicated later.

State-run lenders, who dominate India’s banking sector, carry the bulk of the soured debt.

However, bankers have been reluctant to decide on haircuts or move on resolutions rapidly for fear of being charged by law-enforcement agencies on write-offs taken by them.

With the RBI now explicitly being given powers to intervene and guide banks towards resolution, a part of that “concern or fear will be mitigated”, said Saswata Guha, a director at Fitch Ratings.

“I’m really not sure whether this changes anything overnight, but this will certainly help put the wheels back in motion,” he said.

Guta made the point that the big question on how the incremental capital requirements of the banks would be funded remained unanswered.

India’s banking secretary Anjuly Chib Duggal, who also spoke at the conference, said the government would boost capital injection in banks, if needed, contingent on strict performance parameters.

Fitch estimates that Indian banks will need about $90billion in new capital to tackle bad debt and meet global Basel III banking rules taking effect in March 2019.

However, New Delhi has so far only outlined plans to inject 700-billion rupees ($10.9-billion) into the sector in the four years to March 2019.

The banking sector index closed 0.5% lower after hitting a record high earlier on Friday.

Bad debt rose as huge loans to sectors such as infrastructure came undone after sections of the economy came to a standstill following the 2008 global financial crisis.

Under the previous governor, Raghuram Rajan, the RBI focused on forcing lenders to acknowledge the extent of stressed assets in their books and then to attempt to restructure them under various schemes.

But the measures have had little effect.

Much will depend on how resolutely the RBI implements the latest directive.

“We’ll have to wait for the RBI guidelines to understand how this entire system will work in terms of tackling bad loans, and this will be a fairly long process,” said Shibani Kurian, senior vice-president and head of equity research at Kotak Mutual Fund.

Nonetheless, there is still optimism that the new rules will spark movement.

“Banks earlier had power to initiate insolvency proceedings, but they were unwilling,” said Sujeet Das, a partner at Gravitas Legal.

“Now, if the RBI instructs them, the banks shall be bound to comply with its directions.”

Arundhati Bhattacharya, head of India’s largest lender, the State Bank of India, also welcomed the government’s move aimed at tackling nonperforming assets (NPAs).

“Empowering the RBI with an explicit mandate should reorient various stakeholders for effective NPA resolution,” she said in a brief statement. —

Until capital actually comes in, things are likely to remain a bit difficult