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India central bank hammers risky tycoons

James Crabtree
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India has increased pressure on its heavily indebted companies with rules that allow banks to push out business owners who fail to repay loans.

The move by Raghuram Rajan, central bank governor, represents an escalation of attempts to bring India's problem of bad loans under control, and end a system that made it nearly impossible for banks to recover assets from near-bankrupt businesses. The rules also represent a significant departure from the country's consensual corporate culture.

The Reserve Bank of India rules released on Monday could also pave the way globally for private equity groups such as KKR and Blackstone to take over distressed companies, a step that has been prevented by rules protecting business owners.

Mr Rajan has been sharply critical of many Indian tycoons, saying they have misused state-backed banks by taking on excessive risks and then refusing to repay loans.

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India's economy has been dogged by rising bad debts over recent years, with numerous industrial companies unable to repay creditors. Lenders have faced a rising tide of restructured and non-performing assets, which account for more than 10 per cent of loans across the banking system.

On Monday, the RBI published rules proposing a new "strategic debt restructuring scheme", which allows banks to impose tough conditions on distressed companies that need to renegotiate existing loan agreements.

The rules potentially allow banks to convert these debts into a 51 per cent equity stake, if restructuring conditions are not met.

"If they can do this, it would be a massively significant change, given this has been basically impossible in India before," said Ravi Trivedi, a financial services analyst and former head of banking at KPMG in India.

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"He [Rajan] is saying 'enough is enough'. We have given you guys enough chances. The situation isn't improving. So here are we going to give the banks the teeth that they need," Mr Trivedi said.

The rules follow mounting frustration in India over the inability of the country's state-dominated banking system to grapple with heavily indebted companies.

Recent years have thrown up numerous examples of tycoons who suffered limited consequences from their companies being unable to pay debts, including flamboyant liquor and airline baron Vijay Mallya, whose carrier Kingfisher was grounded due to financial difficulties in 2012.

Mr Rajan warned last month that India's problem with bad debts might not have reached its peak, raising concerns that a legacy of troubled loans could undermine the country's tentative economic recovery.

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Analysts said the rules could face legal challenges from business owners unhappy with equity conversion rules. The RBI's move also relies on the willingness of India's traditionally cautious public sector banks to use their new powers.

However, if the rules do see banks taking control of indebted companies, that could lead to new ownership of some of India's businesses, according to Shinjini Kumar, a director and banking specialist at PwC India

"Private equity as well as turnround specialists will find new business here because of this," she says. "It would be a big change, and certainly a step in the right direction."