India Has a New Plan to Tackle $140 Billion in Bad Loans

India has rolled out a fresh plan to tackle an old problem: the mountain of bad loans held by its banks. With the pandemic forecast to push soured assets to a two-decade high, Prime Minister Narendra Modi is struggling to find cash to support the state-run lenders that hold most of it, and to spur credit to a shrinking economy. Most of the risky debt is concentrated in two sectors -- telecoms and utilities -- that are vulnerable to the economic slowdown, meaning if they face more trouble, then a massive amount of debt goes bad.

When the pandemic slammed India early this year, the central bank allowed lenders to freeze loan repayments through Aug. 31. Jefferies estimates that borrowers accounting for 31% of outstanding loans took up the offer initially, though this eased to about 18% by the end of June as businesses gradually reopened and some realized that postponing repayments could end up being costlier. The focus then shifted to a one-time debt restructuring allowed by the Reserve Bank of India for borrowers that were on track to repay before the lockdown. Lenders can grant loan extensions of as long as two years with or without a freeze on repayments. They have until the end of the year to pick which loans to overhaul and until June 2021 to get it done, and will also need to set aside higher provisioning.