The government has approved a plan to amend existing banking laws that will give more powers to the Reserve Bank of India to address the escalating bad loan crisis at Indian banks.
While the exact details of the plan are still unclear, under the new policy, RBI would work closely with banks and top defaulters under the provisions of India's new bankruptcy code that aims to resolve insolvency and stressed assets.
In addition, several oversight committees will be set up to deal with NPA resolution. The news laws will allow banks to take 'haircuts' on existing bad loans without the threat of any adverse regulatory action, Indian Express reported. 'Haircuts'' are provisions when banks agree to forgo some of the original loan in order to recover at least part of the debt that is owed.
Indian banks have been reluctant to resolve stressed assets for fear of government backlash and the negative public image associated with waiving some of the large corporate loans.
India's new bankruptcy code may allow banks to sell stressed assets to thirds parties at a discount, with the aim to turn around the company under a new management team -- moves that could prove to be unpopular but are in line with bankruptcy laws in developed countries.
The RBI, for its part, has also mooted several debt restructuring schemes to help banks resolve the bad loans. For example, it introduced the 'S4A' scheme last year that would have allowed banks to swap their loans in exchange for equity in part of the bad debt of defaulting companies.
India's banks, particularly public banks, are saddled with bad loans. Even as the RBI has been pushing for a bank cleanup, the bad loans at Indian banks reached a record $150 billion as of December.