India eyes mechanism for "commercially prudent" settlement of bad loans

By Manoj Kumar

NEW DELHI (Reuters) - Finance Minister Arun Jaitley said on Monday that state bankers would propose a mechanism to reach "commercially prudent" loan settlements, as the government and lenders met to discuss how to tackle the country's bad loan problem.

The proposal is to create a steering committee of the five banks with the greatest loan exposure that would analyse problem loans and recommend steps such as replacing management and deep loan restructuring at indebted firms, according to a document seen by Reuters.

The creation of a special panel to handle tough loan decisions has been well flagged, and would give cover for banks to take a "haircut" on irretrievable loans without having to face a political and popular backlash.

"The government is fully committed to supporting the banks in this regard," Jaitley told a news conference in New Delhi.

It would "empower" banks to take decisions while providing legal protection and support for recovery of debt, Jaitley added.

India's banks are saddled with about $120 billion in stressed loans, or 11.5 percent of the total, with 27 public sector banks accounting for the lion's share.

Fixing the state banks, which account for 70 percent of total sector assets, is vital for Prime Minister Narendra Modi's government to revive weak credit and investment growth and put India's economic recovery on a firmer footing.

Asia's No.3 economy clocked up growth of 7.9 percent in the March quarter, making it the world's fastest-growing. But that figure was lifted by government and consumer spending, raising concerns growth could end up fizzling out in a burst of inflation.

The Reserve Bank of India (RBI) holds its bi-monthly policy review on Tuesday, with Governor Raghuram Rajan expected by nearly all economists polled by Reuters to hold rates after a recent uptick in inflation.

PROCESS FLOW

The one-page document set out the "process flow" of the five-bank steering committee that would examine bad loans and then recommend appropriate action.

If a forensic audit commissioned by the panel delivers adverse findings, then a change of management would be initiated and a search launched for a bidder for the business.

If no viable buyer can be found, and the forensic audit finds no wrongdoing, then a deep restructuring would be pursued with the existing promoter, according to the document, based on consultations between the financial services department of the finance ministry and the Indian Banks' Association (IBA).

It was not immediately clear whether this proposal was final but bankers said its goal was to provide a level of legal protection for them in deciding whether to take major haircuts on loans that have gone sour.

"The situation is very grim," said one senior banker who attended the meeting, adding that the main issue was "who will take, and how much, haircut".

The IBA is also considering a proposal to set up two funds to buy equity in companies under debt stress and provide them with working capital, another banker said, confirming a recent newspaper report.

The Economic Times reported at the weekend that the RBI had proposed a Stressed Assets Equity Fund (SAEF) that could be backed by the government, insurers and local and foreign investors. The government contribution would come through the National Investment and Infrastructure Fund.

The other proposed entity, the Stressed Assets Lending Fund (SALF), would provide "last mile" finance to keep troubled businesses ticking over while their debt woes were resolved.

Separately, Jaitley reiterated that the government was ready to provide more capital to the state-run banks if needed. It has earmarked about $3.7 billion for bank recapitalisation in its 2016/17 budget.

(Reporting by Manoj Kumar; Writing by Devidutta Tripathy; Editing by Douglas Busvine and Kim Coghill)