Rajan Goads India Banks to Corral Souring Debt Amid Slowdown

Jan 30, 2014 11:58 pm ET

(Updates shares in fifth paragraph.)

Jan. 31 (Bloomberg) -- India’s central bank head Raghuram Rajan proposed penalties and incentives to urge lenders to move faster in corralling soured debt as he seeks to bolster the financial system amid a slowdown in the South Asian economy.

Banks that work together quickly to restructure bad loans and to recover or sell unviable debt will receive “better regulatory treatment” such as being allowed to spread the loss from sales of distressed assets over two years, the Reserve Bank of India said in a statement on its website yesterday. The lenders would have to double the funds set aside for some bad loans if they fail to take measures to recover the debt.

The guidelines underscore efforts by Rajan, 50, to curtail a rise in soured loans that threatens to erode profitability and capital buffers at the nation’s lenders. Stressed assets, which include bad debts and restructured loans, rose to 10.2 percent of total debt, the highest in a decade, as of Sept. 30, data compiled by the central bank show.

“Stringent implementation of the new rules will check the threat from bad loans,” Vishal Narnolia, Mumbai-based banking analyst at SMC Global Securities Ltd., said by phone yesterday. “So far, many Indian banks have been kicking the can down the road when it comes to stressed assets. Although there will be some accounting pain in the short term, tighter rules will help them clear up the balance sheets even as the economy slows.”

The S&P BSE Bankex index that tracks 12 banking stocks, rose 0.6 percent as of 10:18 a.m. in Mumbai, ending six days of losses. The gauge slumped 20 percent in the past 12 months amid concerns rising bad loans would crimp profits at the lenders. State Bank of India, the nation’s largest, lost 37 percent in the same period and ICICI Bank Ltd. declined 18 percent versus a 3.4 percent gain in the S&P BSE Sensex.

Warning System

The banks will have to comply with the new rules by April 1, the RBI said. The rules are based on draft guidelines published by the central bank on Dec. 17.

The central bank will collect information from lenders on loans of more than 50 million rupees ($801,500) to form a so- called Central Repository of Information on Large Credits, according to the statement. CRILC officials will provide warnings to lenders on borrowers in distress and potential defaults, the regulator said.

Private-equity funds and asset reconstruction companies will be encouraged to “play an active role in stressed assets markets,” RBI said. Leveraged buyouts will be allowed for “specialized entities” to acquire stressed companies, it said.

The guidelines outline “a corrective action plan that will incentivize early identification of problem cases, timely restructuring of accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts,” RBI said in the statement.

--Editors: Chitra Somayaji, Sam Nagarajan