RBI begins to wield new banking clean-up powers

The Reserve Bank of India (RBI) is piling pressure on banks to follow through with plans to clean up their balance sheets, after the government awarded it stronger powers on insolvency and resolution earlier this month.

The central bank has already launched some efforts to speed the decision-making process and force banks into action. “It was made clear to the banks that non-adherence would invite enforcement actions,” the RBI said in a circular on May 22.

The RBI says it is working on an “objective and consistent” decision-making process for cases that are referred to it under India’s new Insolvency and Bankruptcy Code, and building the networks of stakeholders needed to tackle the problem. It has already “sought information” on the scale of bad debts.

India’s banking sector is weighed down by non-performing assets, which the RBI estimates at 17% of aggregate bank assets. The development of “joint lenders’ forums” (JLFs) in 2014 was designed to bring banks together to thrash out solutions, but the scheme has had trouble forcing banks to carry through the JLFs’ recommendations, even where agreement has been possible.

Earlier this month, the RBI reduced the majority needed to approve JLF decisions, required participating banks to implement decisions “without any additional conditionality”, and demanded that banks empower their executives to carry through JLF recommendations.

The RBI is now examining its current guidelines on restructuring with a view to implementing “such modifications as may be necessary” to tackle the largest stressed assets “in a value optimising manner”.

The central bank says it envisages an “important role” for credit rating agencies in the clean-up process, but is also “exploring the feasibility” of conducting its own rating assessments so as to prevent “rating-shopping or any conflict of interest”. Such analysis would be paid for from a fund contributed to both by commercial banks and the RBI itself.

The RBI says it will issue further updates “as may be deemed necessary”. One possibility raised by deputy governor Viral Acharya in February was the creation of an asset management company to take on and resolve banks’ bad debts.

“We simply don’t as a society have any excuse or moral liberty to let the banking sector wounds fester and result in amputation of healthier parts of the economy,” Acharya said.