The Reserve Bank of India (RBI) has proposed rules to help banks recover bad debts, including stricter treatment of delinquent corporate borrowers, in an effort to ease the financial stress on banks as the economy slows.
The RBI also proposed reforming how debts are restructured. The changes would help banks to work more closely and make future borrowing expensive for companies that do not cooperate with lenders.
The central bank outlined the proposals in a discussion paper, released on Tuesday, on early recognition of financial distress, prompt steps for resolution and fair recovery for lenders.
Concern over banks' bad loans has been growing among policymakers in recent months, as economic growth over the past fiscal year subsided to its slowest pace in a decade.
Stressed loans in India - those categorised as bad and restructured - total $100 billion, or about 10 percent of all loans. Fitch Ratings expects that to rise to 15 percent by March 2016.
A large chunk of the bad loans are so-called "wilful" defaults, which is symptomatic of what critics say is a loose loan culture. They keep struggling companies in business but crowd out other borrowers and leave taxpayers on the hook to re-capitalise state banks.
In an attempt to curb such cases, RBI on Tuesday proposed transferring the holdings of company founders to a security trustee until the company is turned around, making it easier to change management.
If the founders cannot bring in more money or find a way to repay some of their loans, the lenders would be able to explore bringing other investors into the company.
"It will definitely improve our financial system, the quality of our disclosures and due diligence," C.V.R. Rajendran, chairman and managing director of state-run Andhra Bank (ADBK.NS) told Reuters. "A major thing to watch out is change of management control. If that happens it will be a gamechanger."
The central bank will create a database of directors on the boards of companies classified as "non-cooperative borrowers" for dissemination to lenders, it said.
The RBI also proposed leveraged buyouts for specialised entities to acquire "stressed companies." It also said sector-specific companies and private equity firms may be allowed to play an active role in the market for stressed assets.
The central bank has invited comments on its discussion paper by Jan 1