India passes new law to tackle bad debt

New Delhi : India yesterday gave greater powers to the central bank to intervene in cases of bad loans, seeking to tackle a mountain of debt that experts say is holding back the economy.

The move authorises the Reserve Bank of India to order banks to take specific measures to deal with bad debts under the provisions of the existing bankruptcy laws.

In its executive order, it said the “stressed assets in the banking system have reached unacceptably high levels and urgent measures are required for their resolution.”

India remains the world’s fastest-growing major economy, but its banks are saddled with some of the highest levels of bad debt in the emerging markets according to the International Monetary Fund.

That means banks are stretched too thin to lend for fresh investments.

But industry experts said it was not clear that the latest move would be sufficient to tackle the problem.

“It’s another tool amongst the many the government has launched without success in the past, and I’m not sure how much it changes things,” Ashish Gupta, Credit Suisse’s head of equity research, said.

“We need to see how RBI moves on this.”

India’s bad loan problem received national attention last year in March when beer and airline tycoon Vijay Mallya fled to the UK to avoid paying nearly $1 billion in loans that he owed banks.

According to Credit Suisse, some 12 trillion rupees ($185 billion) have soured, the bulk of it at public-sector banks.

The 10 largest corporates in the country are also the most burdened with debt and owe a collective 7.5 trillion rupees.