(Adds details, comments from bank executives and analyst)
By Swati Pandey
MUMBAI Dec 17 India's central bank has proposed
rules to help banks recover bad debts, including stricter
treatment of delinquent corporate borrowers, in an effort to
ease the financial stress on banks as the Indian economy slows.
The Reserve Bank of India (RBI) also proposed reforming how
debts are restructured. The changes would help banks to work
more closely and make future borrowing expensive for companies
that do not cooperate with lenders.
The central bank outlined the proposals in a discussion
paper, released on Tuesday, on early recognition of financial
distress, prompt steps for resolution and fair recovery for
Concern over banks' bad loans has been growing among Indian
policymakers in recent months, as economic growth over the past
fiscal year subsided to its slowest pace in a decade.
Stressed loans in India - those categorised as bad and
restructured - total $100 billion, or about 10 percent of all
loans. Fitch Ratings expects that to rise to 15 percent by March
A large chunk of the bad loans are so-called "wilful"
defaults, which is symptomatic of what critics say is a loose
loan culture. They keep struggling companies in business but
crowd out other borrowers and leave taxpayers on the hook to
re-capitalise state banks.
In an attempt to curb such cases, RBI on Tuesday proposed
transferring the holdings of company founders to a security
trustee until the company is turned around, making it easier to
If the founders cannot bring in more money or find a way to
repay some of their loans, the lenders would be able to explore
bringing other investors into the company.
"It will definitely improve our financial system, the
quality of our disclosures and due diligence," C.V.R. Rajendran,
chairman and managing director of state-run Andhra Bank
told Reuters. "A major thing to watch out is change of
management control. If that happens it will be a gamechanger."
The central bank will create a database of directors on the
boards of companies classified as "non-cooperative borrowers"
for dissemination to lenders, it said.
The RBI also proposed leveraged buyouts for specialised
entities to acquire "stressed companies." It also said
sector-specific companies and private equity firms may be
allowed to play an active role in the market for stressed
The central bank has invited comments on its discussion
paper by Jan 1.
(Editing by Sumeet Chatterjee, Larry King)