Analysis: India plans lending reforms as bankers fear new bad debt crisis

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NEW DELHI – Weeks after India unveiled a $32 billion bailout of state-run banks, top finance ministry officials and bankers will meet this weekend to discuss lending reforms designed to prevent another bad loans crisis.

Bankers and policymakers fear India could be throwing good money after bad with the capital injection announced last month, unless it tightens lending rules and institutes governance reforms to insulate banks from political pressure.

“After bailing out the banks with taxpayer money, the government wants to ensure that such a problem doesn’t happen again,” said a senior finance ministry official with direct knowledge of the matter, who declined to share details.

Arun Jaitley, India’s finance minister, has vowed the recapitalization will be accompanied by not only bank reform, but also mergers of weak banks with stronger rivals.

But the government has not commented on the issue of tackling political interference in lending, which bankers say is still one of the biggest problems.

India’s near $147 billion pile of soured loans is replete with examples of powerful and politically connected businesses who are accused of undermining rules to secure credit and then defaulting on loans.

In one of the most high-profile cases, Vijay Mallya, owner of the now-defunct Kingfisher Airlines and former member of parliament, and several former officials of IDBI Bank, have been charged with suspected conspiracy and fraud in relation to a loan of 9 billion rupees ($138 million).

Mallya, who is the head of the Force India Formula One team, has dismissed the charges and fled to Britain.

“There’s a risk of a rise in stressed assets unless bank corporate governance improves,” said N. Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a think-tank funded by the finance ministry.

“CORRUPTION AND KICKBACKS”

A dozen of the country’s largest defaulters, with nearly a quarter of the total bad loans, have already been pushed into insolvency at the command of India’s central bank, but none of these cases are likely to be resolved in the next six months.

A new bankruptcy law allows for an additional three months to reach a resolution, but insolvency professionals say it could take even longer in some cases as the process is untested and could face legal hurdles if the companies do not agree with the proposal.

Steelmaker Bhushan Steel which defaulted on a loan of nearly $7 billion, was given repeated extensions by a consortium of banks, even after its vice chairman was arrested on alleged corruption charges in 2014 before the bankruptcy law came in.

“Corruption and kick-backs are a big issue at public sector banks,” said a Mumbai-based banker at a global lender, adding that the government needed to overhaul credit rules, including those for consortium lending.

Typically consortium lending in India is led by a large bank with as many as 30 others participating, but smaller banks, who are less able to absorb losses, have been faulted for tagging along and not having done their own due diligence in such cases.

India must also tackle due diligence undertaken by banks to avoid repeat defaulters getting access to new loans, said the banker, speaking on condition of anonymity.

Earlier this week, the government approved amendments to the bankruptcy law, barring “willful” defaulters – defined by the central bank as debtors who are able but unwilling to pay – from bidding for companies.

ELEPHANT IN THE ROOM

Bankers say despite the high-profile blow-ups, pressure from politicians continues to influence lending decisions.

P. Mohan, manager of a local branch of State Bank of India, the country’s top lender, said lending committees that include government-appointed nominees should be made accountable for all the sanctioned loans.

“That will also curb politicians from putting undue influence on bankers,” said Mohan.

A spokesman for the finance ministry declined to comment.

Corporate defaults make up the bulk of banks’ total bad loans, and adding to that is growing stress in loans worth 4 trillion rupees given to more than 70 million small enterprises over the last three years under Modi’s flagship program to create jobs.

“We are scared about these risky loans, 50 percent of which may become stressed assets soon,” said D. Franco, a manager at State Bank of India’s branch in Chennai and general secretary of the All India Bank Officers’ Confederation.

Guidelines by India’s central bank also mandate 40 percent of all loans must be to priority sectors such as agriculture, manufacturing and small businesses – many of which are turning sour.

“Public sector banks keep renewing these facilities whereas in normal business banking they would have been written off long ago,” said the banker with the global bank. “That’s the elephant in the room.”