Mumbai: The Reserve Bank of India (RBI) has identified 12 of the country’s biggest loan defaulters and said creditors must pursue bankruptcy proceedings against them, as it begins to cut the $150 billion in stressed debt hobbling Asia’s third-largest economy.
The move comes about a month after the government gave the RBI greater power to deal with unpaid loans, including the authority to direct lenders to initiate the insolvency resolution process in the event of default.
A bankruptcy filing would result in recovering some funds owed or liquidation. Such action means banks can no longer leave bad debt on their books and could force them to put more money aside to cover losses – at a time when funds are already short as banks seek to comply with international capital standards.
“This year’s bet was that provisioning requirements would come down,” said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance. “But if this step is taken then perhaps this year again could be another year of delay in banking sector profit recovery.”
In a statement late on Tuesday, the RBI said it identified the 12 defaulters by focusing on accounts owing more than Rs 50 billion and where 60% or more of the account holder’s loans were classified as non-performing as of March 2016.
The RBI said those accounts constituted about 25% of overall gross non-performing assets. It did not identify the defaulters or banks, though most bad debt is at state-run banks with infrastructure, power and metals firms accounting for most.
Credit Suisse estimated the amount at the 12 defaulters at Rs 2 trillion, made up of loans mainly of steel, textile and construction firms.
The RBI also said lenders have six months to finalise resolution plans for other non-performing accounts, and that insolvency proceedings must be pursued for unresolved accounts. It did not specify criteria for those other accounts.
India‘s stressed debt has reached its highest-ever level, with about 80% made up of non-performing loans and the remainder restructured loans.
Stressed debt leaves less funds available for new loans and so slows economic growth. The government has therefore attempted to reduce the amount in recent years through measures such as debt-for-equity swaps.
Under the latest directive, banks must individually or jointly start proceedings against the 12 defaulters under a bankruptcy code passed last year – a process that could take up to nine months.
The central bank said it would separately issue directions on provisioning for debt subject to bankruptcy proceedings.
Sapan Gupta, a banking lawyer at Shardul Amarchand Mangaldas, called the RBI’s move “a positive and bold step.” He said nine months runs to March 31 indicating a desire to deal with the issue by the end of the current financial year.
Shares in Indian banks rose as much as 0.4 % in early Wednesday trade before edging slightly lower.