RBI says looking at bank powers to tackle stressed assets

By Suvashree Choudhury

KOLKATA (Reuters) - The Reserve Bank of India said on Friday it would look at the way banks use measures intended to help them tackle a crippling bad-debt burden, as concern grows that lenders are using the tools to camouflage troubled loans instead.

Grappling with more than $110 billion of stressed loans, India's banks have faced questions this week over their use of one of the most high-profile tools offered to the sector by the central bank - strategic debt restructuring (SDR).

SDR helps banks swap unpaid debt for majority control in troubled companies.

Crucially, it allows debt in the process to be classed as "standard", without extra provisions or writedowns, for 18 months.

Analysts argue that encourages banks to use the provision to play down the extent of sour loans on their books, delaying recognition of the problem.

"We have spent much of the last few quarters creating a variety of bank powers to deal with stressed assets. SDR is just one of them," Rajan said. "Having given those powers, we are now looking at how those powers are implemented."

"These are meant not so much to postpone the day of reckoning but to actually deal with stressed assets in an effective way," he told reporters, adding the central bank will hold talks with lenders.

A policymaker aware of the central bank's thinking said it was too early to jump to conclusions on lenders' practices, adding the RBI had no evidence of wrongdoing.

But he said the central bank had called a meeting on Monday to discuss asset quality concerns, and that would include SDR.

Since SDR was introduced in June, it has been invoked by banks in nine cases, with at least one other due. Total SDR debts amount to some 641 billion rupees ($9.6 billion), or about 1 percent of all loans.

But none of these cases have seen banks swap debt for equity, take control or significantly cut debt.

The central bank has yet to say what steps it will take if banks are found to be misusing tools like SDR or 5:25, a refinancing option intended for the infrastructure sector.

Concerns that changes could include a demand for extra provisions, however, hit bank stocks on Friday, with State Bank of India closing down 2 percent and ICICI Bank down 3.7 percent. The Bank Nifty fell 2.2 percent, against a 1 percent drop in the Nifty.

Rajan also reiterated his aim of cleaning up India's banking sector by March 2017.

(Writing by Devidutta Tripathy; Editing by Clara Ferreira Marques; Editing by Kim Coghill, Robert Birsel)