India’s Central Bank Suggests Tighter Rules to Curb Soured Debt

India’s central bank said lenders may boost borrowing costs for defaulters who aren’t cooperating to help recover soured debt, as it steps up efforts to curb rising bad loans in a slowing economy.

Banks should form a panel and set timelines to resolve bad debt, the Reserve Bank of India said in a discussion paper released on its website today. The regulator also proposed higher provisions on such debt if the lenders can’t reach an agreement regarding their recovery or sale.

Asset quality at Indian banks is deteriorating as a surge in funding costs hurts the repayment ability of businesses already bearing the brunt of the slowing economic growth. Stressed assets, which include bad and restructured loans, rose to 10.02 percent of total debt, the highest in a decade, as of June 30, central bank data show.

The rise in soured debt is threatening to erode earnings at Indian banks, which are required to set aside more cash as risk provisions against non-performing assets. The RBI predicts India’s economy will expand 5 percent in the 12 months through March 31, the same pace as the last fiscal year, which was the weakest in a decade.

India’s S&P BSE Bankex index, a gauge of 13 banking stocks, slumped 11 percent this year. State Bank of India, the nation’s largest, lost 28 percent and ICICI Bank Ltd. (ICICIBC) fell four percent in the period.

Private equity funds and asset reconstruction companies will be encouraged to buy “stressed companies,” the RBI said, seeking feedback on its proposals by January 1, according to the statement.

To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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