The Reserve Bank of India, in the past one year, has toughened up its stance on big corporate debtors, pressurising them to pay despite an effective national bankruptcy law. It has also hardened its approach with other banks, demanding they make full provisions for all troubled loans, whether they are formally classified as non-performing or not, by the end of March 2017.
RBI stated that stressed assets accounted for an estimated 14 per cent of India's total banking system as of September. State-owned banks in particular find no hope as the stressed assets account for 17 per cent of their total lending, with 6.2 per cent of total loans classified as non-performing. A senior banker said, “The lack of willingness to deal with problems, that's changed. There has been an enormous change in behaviour. Historically India has made the right decisions with its back to the wall. And we so have our backs to the wall now.” Under a strategic debt restructuring scheme revealed by the central bank in June, companies that revise loans must now sign binding contracts that enable their lenders to take over the company if it fails to comply with the new repayment terms. Officials say the threat of losing control gives company owners a much stronger incentive to find ways to repay, either by selling assets or potentially raising fresh capital. “Part of the push is coming from the RBI, but companies themselves are realising that they have to start getting their own act together,” says Rajeev Malik, senior economist at CLSA. “They can’t just keep sitting and nursing their wounds and choose not to do anything.”
“If the assets are not correctly marked to their value, finding a buyer is difficult,” Ashish Gupta, head of Indian equity research at Credit Suisse said. “Once banks start taking provisions, the gap between the book value and fair value narrows and deals become more possible.” Economists said such transactions are likely to accelerate as India's economy gains momentum, boosting asset prices and increasing corporate owners' willingness to let go. The administration has also introduced a long-awaited new bankruptcy law in Parliament that would significantly strengthen banks' leverage over delinquent borrowers if passed.
