India allows banks flexibility on big projects to reboot growth

By Suvashree Choudhury

MUMBAI (Reuters) - The Reserve Bank of India (RBI) has allowed lenders more flexibility to restructure large projects that stall when cash runs out, but stopped short on Tuesday of giving banks freer rein on other problematic loans.

In the RBI's monetary policy statement review, Governor Raghuram Rajan said banks could extend timelines for large stalled projects by bringing in new 'promoters', or owners.

Prime Minister Narendra Modi swept to power last year on promises to revive India's economy, partly by freeing up delayed infrastructure projects, clearing an investment logjam and fixing bottlenecks that have curtailed growth.

Banks in India have the largest exposure to the infrastructure sector, and have become more cautious about lending to it after bad loans surged as growth slowed.

"If there is a new promoter brought in, then banks could get some more time to complete the project... That could put some projects that are stuck back on the field," Rajan said.

But he stopped short of allowing different treatment for restructured loans, or those likely to turn bad, from bad loans after April 1. This means banks will have to make additional provisions.

Banks had sought an extra year, given the slow pace of economic recovery.

"We have given an enormous amount of new flexibility in trying to get these projects back on track," Rajan said. "But I don't think the answer is to extend and extend and extend - it is to call a spade a spade."

The Indian banking sector has roughly 6 trillion rupees ($97.23 billion) of stressed assets, 45 percent of which have already turned sour, with the rest in the restructured or the troubled category.

"The economy has not turned around. We don't see any... realities having changed and that's why we had said maybe the forbearance needed to be extended another year," State Bank of India chairman Arundhati Bhattacharya said on ET Now television.

Rajan also said the central bank was still in talks to hammer out a deal with market regulator SEBI to beef up the equity banks can hold if they swap bad debts for shares.

Currently, banks cannot be left with a holding of more than 10 percent after a debt-for-equity swap. That is set to increase to 30 percent, but the central bank is still in talks with the regulator to iron out pricing details, as it worries banks are taking on too much of the cost of restructuring.

($1=61.7125 rupees)

(Additional reporting by Devidutta Tripathy; Editing by Clara Ferreira Marques and Clarence Fernandez)