NEW DELHI/MUMBAI – India on Friday tweaked its laws to help tackle the record $150 billion in troubled bank debts, giving its central bank greater power to identify and enforce resolution on specific soured loans.
In an executive order that alters India’s Banking Regulation Act, the government authorized the Reserve Bank of India to direct banks to initiate an insolvency resolution process in the case of a default under provisions of the bankruptcy code.
The ordinance, which goes into effect immediately, also said the RBI may specify one or more authorities, or panels to advise banks on resolution of stressed assets.
The move marks the latest attempt to tackle the record 9.64 trillion rupees ($150 billion) in stressed loans accumulated as of the end of December that have choked new credit and hurt 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.
State-run lenders, who dominate India’s banking sector, carry the bulk of the soured debt. Bankers, however, 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 toward resolutions, 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, noting that the big question on how the banks’ incremental capital requirements will be funded remained unanswered.
Fitch estimates Indian banks will need about $90 billion in new capital to tackle bad debt and meet global Basel III banking rules taking effect in March 2019. New Delhi, however, 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 was down 0.5 percent at 0940 GMT 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 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 so far the measures have had little impact.
Much will now 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, some remain optimistic 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.”