India’s Reserve Bank of India (RBI) relaxed guidelines for lenders restructuring large stressed loans, a move that could allow banks to more effectively manage bad loans.
As per RBI’s statement on Monday, lenders would be allowed to differentiate between stressed loan accounts into the following two categories.
- The sustainable debt portion that banks, or a lending syndicate, deem repayable and that the borrower would continue repaying on existing terms.
- The second is the remainder that a borrower is deemed unable to repay, which can now be converted into equity or convertible debt, giving lenders a chance to eventually recover funds if and when the borrower is able to turn around its business.
However, it should be noted that the above categories would only apply on loans of over INR 5bn ($74m) from a single bank or a syndicate, and only if a borrower’s project is already in commercial operation.
The move comes amid RBI’s deadline of March 2017 to banks to clear up their balance sheets of non-performing loans, which has swelled to about $120bn.
According to Reserve Bank of India’s Governor Raghuram Rajan, banks should refrain from taking a majority stake in planned stressed-asset funds, and prefers external investors and funds to take up that role.
His words came amid the Indian government’s plans to find ways to lower bank’s distressed debt pile of $120bn, or 11.5% of all loans.
However, bankers have said talks are on for two kinds of stressed-asset funds: one that would buy bad loans from the banks and the other that can invest in companies needing more capital.
Rajan also stressed that pricing would be a key issue for a stressed fund if it wanted to buy bad loans from the banks.
The government, as part of its plan of implementing new bankruptcy laws, is considering setting up an external panel to decide on the quantum of ‘haircuts’ taken on the bad loans, mainly due to disagreements between companies and banks at the time of transacting on such loans.
In order to tackle $117bn of bad loans threatening to derail Indian Prime Minister Narendra Modi’s growth plans, rules were eased by the government allowing a single investor to own 100% of an asset reconstruction company. Previously, the ownership of ARC’s was capped at 50%.
As part of the federal budget unveiled by India’s Finance Minister Arun Jaitley yesterday, ownership rules for ARCs were eased from 1 April 2016 onwards. Mr. Jaitley also allocated INR 250bn for the recapitalization of state-owned banks in 2016, similar to the outlay in 2015.
There are 15 ARCs operational in India after the nation passed the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act in 2002 to help reorganize non-performing credit.
Loans in India increased by 11.5% for the last 12 months through 5 February 2016, less than the five-year average of 14.7%, as per central bank Reserve Bank of India’s data.
ARCs are expecting record business in 2016 after RBI Governor Raghuram Rajan set banks a deadline of March 2017 to clean up their balance sheets. He allowed those completing a deal by March to spread losses from the sale of distressed-assets over two years.