Putting its foot down, the Reserve Bank of India has decided to order lenders to tip 12 companies into bankruptcy proceedings. The unnamed companies represent a quarter of the country's estimated $120 billion bad loan problems.
In order to maintain balance, the RBI simply picked accounts with liabilities of over $780 million, and where 60 per cent or more of the borrowings were non-performing as of March 2016. For all other big, deadbeat borrowers who did not meet the original threshold, the RBI threatens the same fate unless banks agree a resolution plan within six months.
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% of non-performing loans, according to Credit Suisse analysts. They reckon some companies need at least an 80% reduction in their interest burden to cover payments at current levels of profitability.
In any case, India will move closer to establishing how much capital must be pumped into public sector banks. Estimates vary wildly, from $20 billion upwards. The RBI has played its role now the ball is back in New Delhi’s court.
