(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Una Galani
MUMBAI, June 14 (Reuters Breakingviews) - India's central
bank has decided enough is enough. The Reserve Bank of India
will order lenders to tip 12 companies into bankruptcy
proceedings. These unnamed dirty dozen, most likely in the steel
and power sector, represent a quarter of the country’s estimated
$120 billion bad-loan problem. That will test a barely
one-year-old insolvency regime.
Prime Minister Narendra Modi's government last month passed
rules that empowered the regulator to make commercial decisions.
That put responsibility for resolving the bad-loan mess squarely
with the central bank. It is not clear that the RBI wanted these
powers, but now it has them it is moving fast. That suggests a
determination to clean up the system and defend the
To avoid any accusation of bias, the RBI has simply picked
accounts with liabilities of more than roughly $780 million, and
where 60 percent or more of the borrowings were non-performing
as of March 2016. For all the other big, deadbeat borrowers who
did not meet this original threshold, the RBI is threatening the
same fate unless banks agree a resolution plan within six
By moving so quickly, the RBI can avoid criticism that it
was not doing enough to fix the financial system. The focus will
immediately switch to the other arms of the state that are
charged with implementing the new bankruptcy code, and whether
they are fit for purpose.
The landmark reform envisions wrapping up an insolvency
process within 180 days, with the option of a 90-day extension.
But to date, no companies have completed the process, issues of
legal interpretation have come up, and the National Company Law
Tribunal is still hiring to fill vacancies.
If the process works, haircuts may exceed lenders’ existing
provisions. Across the banking system these amount to 44 percent
of non-performing loans, according to Credit Suisse analysts.
They reckon some companies need at least an 80 percent reduction
in their interest burden to cover payments at current levels of
In any case, India will move closer to establishing out how
much capital must be pumped into state banks. Estimates vary
wildly, from $20 billion upwards. The RBI has played its role –
now the ball is back in New Delhi's court.
On Twitter twitter.com/ugalani
- India's central bank said on June 13 that it would ask
banks to push 12 companies into insolvency proceedings.
- An internal committee in the Reserve Bank of India
identified accounts with outstanding liabilities of more than 50
billion rupees ($778 million), and where 60 percent or more of
the borrower’s debt was non-performing as of March 2016.
- The 12 accounts represent 25 percent of the gross
non-performing assets of the banking system, the RBI said in a
statement. For other non-performing accounts, the committee
recommended that banks should finalise a resolution plan within
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(Editing by Quentin Webb and Nicolle Liu)