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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Una Galani
MUMBAI, May 23 (Reuters Breakingviews) - India's central bank is taking an increasingly hands-on approach to whipping lenders back into shape. As part of a broader plan to fix the country's $150 billion bad debt problem, the Reserve Bank of India now says it is exploring the idea of picking credit agencies to rate outstanding stressed loans, and help to pay for the job. It is a bid to stop borrowers shopping for good scores. The idea could force agencies to adapt, or it may muddy the RBI's role by leading the regulator further into commercial decision-making.
The proposal comes barely two weeks after New Delhi empowered the RBI to force lenders to push errant borrowers into bankruptcy. Although the bad debt is mostly with state-owned banks, that move prompted questions about excessive official meddling. Handing a role to the RBI in ratings would potentially mean the regulator getting its hands even dirtier.
There is an inherent conflict in companies paying for the ratings of their own debt. The “issuer pays” model probably hit its nadir with wildly over-optimistic ratings on Wall Street’s mortgage-backed bonds, which were at the centre of the global financial crisis. Yet a 2009 paper led by India's own finance ministry has previously warned that the "regulator pays" model is not a good alternative, partly because investors might take riskier bets, believing debts had implicit state support.
If the RBI chooses and partially pays an agency to rate a stressed loan, or to sign off on a specific restructuring proposal to restore the viability of a company, investors and markets would see the rating as having a high-level endorsement. If that turnaround plan later falls short of expectations, the RBI would get blamed. That could hurt the credibility of one of the country's most respected institutions.
But it may not come to this extreme. The simple threat of intervention could force rating agencies to coordinate to change their approach to dealing with stressed loans. That could be a better outcome. India's central bank has for years been trying to increase the space between itself and lenders it regulates. The bad-loan fight is pulling the RBI in the other direction.
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- The Reserve Bank of India on May 22 outlined a plan to resolve the country’s $150 billion bad debt problem. The move comes about two weeks after New Delhi gave the central bank greater power to deal with bad loans.
- The RBI said it is working on a framework to help "facilitate an objective and consistent decision making process" for cases that can be taken to insolvency courts.
- It is also “exploring the feasibility of rating assignments being determined” by the central bank itself, to stop borrowers shopping around for credit ratings. The RBI said this would be paid for by itself and other banks, but did not spell out in detail how this new system would work.
- In addition, the RBI said it would enlarge an oversight committee that guides banks on restructuring bad loans.
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Editing by Quentin Webb and Kathy Gao