(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
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.
On Twitter twitter.com/ugalani
- 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.
- For previous columns by the author, Reuters customers can
- SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS: bit.ly/BVsubscribe
(Editing by Quentin Webb and Kathy Gao)