Advertisement

India may give banks more leeway to deal with bad loans

By Neha Dasgupta and Suvashree Choudhury ANAND, India (Reuters) - India could give banks more flexibility to restructure distressed loans in a bid to steer funding towards cash-strapped infrastructure projects, Reserve Bank of India (RBI) Governor Raghuram Rajan said on Tuesday. Rajan said, however, the RBI would continue to ensure lenders flag and deal with problematic loans quickly, given the dangers to India's financial system should banks engage in "ostrich-like" behaviour of "hoping the problem will go away". Reviving investment and boosting infrastructure are two key objectives for Prime Minister Narendra Modi, who won elections in May promising to rekindle India's faltering economy after two years of growth below five percent. A major factor slowing credit flows to infrastructure projects has been the amount of bad loans on banks' books. Including restructured loans, stressed assets are estimated at 6 trillion rupees (62 billion pounds), or nearly a tenth of total loans. "The RBI is exploring ways to allow banks more flexibility in restructuring," Rajan said in a speech at the Institute of Rural Management in Gujarat. "This is a risk we are prepared to take if it allows more projects to be set on the track to recovery," he said, without giving details of measures being explored. Still, Rajan said the central bank would oppose any delay by banks to recognise bad loans. About 45 percent of stressed loans have already gone sour. The remainder is in the "restructured" category, which means the loans have problems but banks only need to set aside minimal reserves. From April next year, new rules will abolish the "restructured" category and prompt banks to chase customers for payment or set aside billions more reserves, once non-performing loans are recognised. "The fundamental lesson of every situation of banking stress in recent years across the world is to recognise and flag the problem loans quickly and deal with them," Rajan said. "So regulatory forbearance, which is a euphemism for regulators collaborating with banks to hide problems and push them into the future, is a bad idea." Rajan also warned of the negative consequences of borrowers defaulting without suffering a financial hit as this raised the cost of loans across the financial system -- reiterating his previous comments. Rajan estimated that power loans were three percentage points more expensive than home loans due to banks' concerns about recovering debts from these types of borrowers. The central bank tightened rules against these defaulters in September. (Additional reporting by Devidutta Tripathy in Mumbai; Editing by Rafael Nam and David Clarke)