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India’s RBI Proposes Higher Provisions to Curtail Bad Loans

A cyclist passes a Bombay Intelligence Security officer in front of the Reserve Bank of India headquarters in Mumbai, on July 22, 2013. Photographer: Kuni Takahashi/Bloomberg
A cyclist passes a Bombay Intelligence Security officer in front of the Reserve Bank of India headquarters in Mumbai, on July 22, 2013. Photographer: Kuni Takahashi/Bloomberg

Dec. 18 (Bloomberg) -- India’s central bank said lenders failing to curtail soured loans may have to strengthen their buffers against defaults as it steps up efforts to curb rising bad debt amid an economic slowdown.

The Reserve Bank of India proposed to as much as double provisions on some bad debts if lenders can’t reach an agreement regarding their recovery or sale. Banks attempting to conceal stressed loans will also have to boost their risk buffers, it said in a discussion paper released in Mumbai yesterday.

Private-equity funds and asset reconstruction companies will be encouraged to “play an active role in stressed assets markets,” the RBI said. Asset quality at Indian banks is deteriorating as a surge in funding costs hurts the ability of businesses to repay a debt in an economy growing at the slowest pace in a decade.

“The RBI is adopting a carrot-and-stick method to tackle bad loans,” said Nitin Kumar, a Mumbai-based banking analyst at Quant Broking Pvt. “A rigid timeframe for resolving stressed assets and easier rules for the sale of non-performing loans will nudge the lenders to improve the quality of the loan book.”

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 increase in soured debt is threatening to erode earnings at Indian banks.

Rate Surprise

The RBI unexpectedly left the benchmark interest rate unchanged today even as it faces Asia’s fastest consumer-price inflation, supporting economic growth in the South Asian nation. An increase in the repurchase rate from 7.75 percent, as 26 of 31 analysts predicted in a Bloomberg News survey, could have increased pressure on company balance sheets.

The S&P BSE Bankex index, a gauge of 13 banking stocks, has slumped 9.3 percent this year. State Bank of India, the nation’s largest lender, has lost 26 percent and ICICI Bank Ltd. has fallen about 2 percent. The broader S&P BSE Sensex index has gained about 7 percent.

The RBI proposed a “more liberal regulatory treatment of asset sales.” Leveraged buyouts will be allowed for “specialized entities” to acquire stressed companies, it said.

Defaulters who aren’t cooperating with banks to help recover soured debt may have to pay higher borrowing costs, the RBI said, seeking feedback on its proposals by Jan. 1.

Prompt Steps

“Not only do financially distressed assets produce less than economically possible, they also deteriorate quickly in value,” the RBI said. “Therefore, there is a need to ensure that the banking system recognizes financial distress early, takes prompt steps to resolve it, and ensure fair recovery for lenders and investors.”

State Bank of India had the highest nonperforming loan ratio of the 11 lenders tracked by Bloomberg Industries. Its gross ratio of soured debt to total lending widened to 5.64 percent in the three months to Sept. 30 from 5.15 percent a year earlier, the Mumbai-based bank said in a filing on Nov. 13.

Provisions for defaults rose 44 percent in the period, the filing showed. The lender’s more than 15,000 branches control 16.8 percent of the nation’s 73 trillion rupees of deposits, according to central bank data.

SBI will continue in coming months its “war on bad loans,” which will fall sustainably only when economic growth picks up, Chairman Arundhati Bhattacharya said Oct. 8.

The central bank 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.

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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