A step for India’s banks, but no giant leap for bad debt

Mumbai/Bengaluru: India’s move to strengthen the hand of its central bank will help it push reluctant lenders towards write-downs and errant borrowers into insolvency, bankers said, but the country is far from drawing a line under its $150 billion of sour debts.

India’s bad loan problem is choking off new credit and dampening economic growth, and the government of Prime Minister Narendra Modi knows it needs to act.

Friday’s changes to legislation governing India’s banks—the most significant since the passage of bankruptcy reforms last year—authorise the Reserve Bank of India (RBI) to push more lenders to start insolvency proceedings.

The RBI, meanwhile, lowered the number of creditors who need to agree for a decision to be reached on a loan.

That in itself is a major step in a system where large numbers of lenders are behind a single loan—syndicates of 20 or even 30 lenders are not infrequent in India—and matters often end in deadlock when things go wrong.

But while bankers and industry officials said the moves would help prevent smaller lenders holding an entire syndicate hostage—for them a single write-down can be a significant blow—bankers and analysts labelled Friday’s moves as incremental.

The changes did not do enough to resolve the complex insolvency process or a much-needed bank recapitalisation, they said.

“The latest move is not a silver bullet, but it’s better than nothing,” said Varun Khandelwal, managing director, Bullero Capital.

“Its primary benefit will be to break log-jams in the Joint Lender Forums where sometimes consensus could be not reached due to a few members being unwilling to take a hit on their balance sheets,” he added.

The bulk of India’s problem debt is with state-run banks, where chief executives do not typically serve for beyond three years. As civil servants, some fear that bad decisions will come back to haunt them - cases of former bank heads being arrested over loan defaults spark fear - and so fail to move at all.

The changes ensure the RBI can offer cover.

“The good part is that now you cannot blame a bank managing director, or executive director for a (haircut) decision taken during his tenure,” said a senior state-run bank official.

“He can now say ‘I did that because RBI told me to’.”

Loans to sectors like infrastructure, power, iron and steel account for the biggest share of non-performing assets in India. Struggling projects and weaker prices are among the factors that have curtailed loan repayments in these sectors.

Some will recover but others will not, making the proposed changes key.