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RBI reveals plan to tackle banks’ $150 bn bad loans

23 May, 2017

The Reserve Bank of India (RBI) outlined on Monday the broad contours of a plan to resolve the $150 billion bad debt problem plaguing the country’s banks.

The move comes about two weeks after the Indian government changed rules giving the central bank greater power to deal with bad loans.

Among the plans announced late on Monday, the RBI said it is reviewing and would make necessary changes to current guidelines for restructuring of stressed loans. It is also working on a framework to help “facilitate an objective and consistent decision-making process,” for cases that can be taken to insolvency courts.

In a bid to avoid borrowers shopping around for credit ratings, the RBI said it is “exploring the feasibility of rating assignments being determined by the Reserve Bank itself and paid for from a fund to be created out of contribution from the banks and the Reserve Bank”.

The RBI did not spell out how this new system would work, but some tentatively welcomed the move as a positive step.

“So far we had to notch down a corporate if its rating was done by a less-reputed rating agency. But now the RBI’s criteria on rating assignment should help us get better clarity on how to scale the ratings,” said a senior treasury official at a private sector bank.

Slower economic growth and in some cases profligate lending practices have been blamed for the surge in bad loans, with more than 20 banks majority-owned by the government holding the bulk of the bad assets.

Resolving the bad loan problem is the government of Prime Minister Narendra Modi’s economic policy centrepiece and it issued an executive order earlier this month to modify rules around the country’s banking regulation act.

On the planned push to bankruptcy under the Insolvency and Bankruptcy Code, the RBI said it has already sought information from banks on the current status of their large stressed assets. The regulator said it plans to form a separate panel, comprised mainly of its independent board members, to advise it on this.

The central bank said in the near future it would also hold meetings with stakeholders including banks, asset reconstruction companies, rating agencies and private equity firms, among others, for their cooperation and coordination.

In addition, the RBI said it would enlarge an oversight committee that guides banks on restructuring bad loans.

As well as new members, the scope of the panel will be expanded to look beyond the limited mandate of cases it currently handles, the regulator said.

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RBI reveals plan to tackle banks’ $150 bn bad loans

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