BREAKINGVIEWS-India's RBI boldly pulls trigger on bad loan mess

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

MUMBAI, June 14 (Reuters Breakingviews) - India’s central bank has decided enough is enough. The Reserve Bank of India will order lenders to tip 12 companies into bankruptcy proceedings. These unnamed dirty dozen, most likely in the steel and power sector, represent a quarter of the country’s estimated $120 billion bad-loan problem. That will test a barely one-year-old insolvency regime.

Prime Minister Narendra Modi’s government last month passed rules that empowered the regulator to make commercial decisions. That put responsibility for resolving the bad-loan mess squarely with the central bank. It is not clear that the RBI wanted these powers, but now it has them it is moving fast. That suggests a determination to clean up the system and defend the institution’s credibility.

To avoid any accusation of bias, the RBI has simply picked accounts with liabilities of more than roughly $780 million, and where 60 percent or more of the borrowings were non-performing as of March 2016. For all the other big, deadbeat borrowers who did not meet this original threshold, the RBI is threatening the same fate unless banks agree a resolution plan within six months.

By moving so quickly, the RBI can avoid criticism that it was not doing enough to fix the financial system. The focus will immediately switch to the other arms of the state that are charged with implementing the new bankruptcy code, and whether they are fit for purpose.

The landmark reform envisions wrapping up an insolvency process within 180 days, with the option of a 90-day extension. But to date, no companies have completed the process, issues of legal interpretation have come up, and the National Company Law Tribunal is still hiring to fill vacancies.

If the process works, haircuts may exceed lenders’ existing provisions. Across the banking system these amount to 44 percent of non-performing loans, according to Credit Suisse analysts. They reckon some companies need at least an 80 percent reduction in their interest burden to cover payments at current levels of profitability.

In any case, India will move closer to establishing out how much capital must be pumped into state banks. Estimates vary wildly, from $20 billion upwards. The RBI has played its role – now the ball is back in New Delhi’s court.

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- India’s central bank said on June 13 that it would ask banks to push 12 companies into insolvency proceedings.

- An internal committee in the Reserve Bank of India identified accounts with outstanding liabilities of more than 50 billion rupees ($778 million), and where 60 percent or more of the borrower’s debt was non-performing as of March 2016.

- The 12 accounts represent 25 percent of the gross non-performing assets of the banking system, the RBI said in a statement. For other non-performing accounts, the committee recommended that banks should finalise a resolution plan within six months.

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Editing by Quentin Webb and Nicolle Liu