Disgrace before default
In a bid to crack down on delinquent borrowers, the Indian regulator has ordered publicly traded companies to notify the stock exchange if they default on a bank loan from October 1.
mumbai — India’s regulator is putting a spotlight on dealings between banks and troubled borrowers by requiring listed companies to report within one working day missed interest or installment payments on loans.
Publicly traded companies in India from October 1 will need to notify the stock exchange of a default on a bank loan, following an order from the Securities and Exchange Board of India (Sebi) this month. The move may help Indian authorities to stem mounting bad loans by putting pressure on borrowers to honour obligations and banks to improve credit vetting.
“Transparency has finally arrived — a little late, but nevertheless a welcome arrival for an information-hungry market,” Hemindra Hazari, a Mumbai-based independent banking analyst. “While this may improve borrower discipline, there will be tremendous pressure on banks, financial institutions and credit rating agencies and on their credibility.”
Mounting bad loans are hurting lender profits and sapping their ability to support growth, with the government and the Reserve Bank of India increasingly having to step in to prop up weaker state-owned lenders. Stressed or non-performing assets, restructured debt and advances to companies that can’t meet servicing requirements at local lenders was 17 per cent by the end of December, the highest among major economies, according to finance ministry data released earlier this year.
The one-day reporting requirement will also apply to defaults on commercial paper, medium-term notes, foreign-currency convertible bonds and other listed securities. Defaults on bonds and syndicated loans from companies are at record $1.9 billion so far in 2017, compared with a total of $494 million for full-year 2016.
India’s economy probably expanded at 6.9 per cent in the second quarter, according to the latest results of a Bloomberg News survey of 50 economists, down from a previous estimate of seven per cent. A report on the economy released by Prime Minister Narendra Modi’s chief economic adviser, Arvind Subramanian, this month called for interest rates to be cut as India struggles with subdued private sector investment and rising non-performing assets.
“Many banks are presently under considerable stress on account of large loans to the corporate sector turning into stressed assets,” Sebi said in a statement on August 4. Companies in India continue to be primarily reliant on loans for funding and the new order addresses a “critical gap in the availability of information to investors,” according to the statement.
“There will be less information asymmetry and all lenders will get to know signs of financial distress,” Ananda Bhoumik, chief analytical officer at India Ratings and Research, said. “It forces companies to evaluate strategy and do something to solve the problem. It will help in early sighting of signs of any potential distress in borrowers.” — Bloomberg