India is relaxing bad debt settlement rules and giving banks more leeway
The Reserve Bank of India relaxed rules to give lenders burdened with bad debt more time to settle overdue accounts and increased a deadline for bringing debtors to court in bankruptcy courts.
The policy, which also affects shadow banking, gives lenders 30 days to review an overdue account and another 180 days to implement a resolution plan, easing the previous schedule. Lenders must take additional precautions if there is a delay in executing the plan, the central bank said on Friday.
India’s Supreme Court in April overturned an RBI policy setting a schedule for recasting overdue accounts, which asked banks to seek loan solutions if borrowers defaulted within a single day and take them to a bankruptcy court, if the restructuring is not completed within 180 days. Industry associations of power generation companies, shipyards and sugar factories have challenged the directive.
“The new guidelines provide a system of strong barriers in the form of additional provisions for delays in initiating liquidation or bankruptcy proceedings,” said RBI Governor Shaktikanta Das in a speech on Saturday. “The new framework makes agreements between creditors mandatory and provides that a majority decision is enforced.”
“This is a good step to calm the market. It also gives banks the leeway to do as much as possible to avoid bankruptcy proceedings, ”said Chitranshul Sinha, partner at Dua Associates, where he focuses on bankruptcy law. “It is also an opportunity for promoters to save their business.”
The measures are loosening the discipline previous governors tried to put in place to clean up a banking system with the world’s worst non-performing loan rate. This has eased lending rules for some weak state banks and allowed loans to small businesses to be restructured to stimulate lending and economic growth.
The rules, which come into effect immediately, give lenders discretion in how to deal with loan defaults. Banks must also set aside up to 35% of the outstanding amount if they miss the deadline to implement resolution plans.
The supervisory authority reserves the right to issue instructions to initiate insolvency proceedings against borrowers in the event of certain defaults in order to maintain the processing speed.
“The current circular is expected to uphold the credit culture improvements initiated by past efforts by the government and the Reserve Bank of India,” the central bank said in its statement.