India plans lending reforms as bankers fear new bad debt crisis

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 recapitalisation 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.

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.