Banks Squeezing Indian Businesses Further In Fight Against $207 billion Bad Loans

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Banks Squeezing Indian Businesses Further In Fight Against $207 billion Bad Loans
Banks Squeezing Indian Businesses Further In Fight Against $207 billion Bad Loans

Hit hard by widespread corporate defaults, India’s lenders are beefing up the rules for borrowers, adding in more stringent debt covenants and greater enforcement as they seek to curb the spread of bad loans.

Banks are now requiring collateral that may amount to around one-and-a half times the value of the loan being extended recently, according to Prabal Banerjee, chief financial officer at Bajaj Group. Further they are insisting on having contracts that permit loans to be converted to equity in cases where the assets get stressed.

According to Rethish Varma, an equity researcher with MarketSmith India, banks were doing their best to recover what they can at the first instances of trouble.

S&P Global Ratings analyst Abhishek Dangra noted that that borrowers belonging to sectors such as telecom, steel and thermal power are the ones facing stricter terms.

Tougher Rules To Reduce Chances Of Default 

Indian lending institutions are ramping up on enforcing safeguards as they struggle to address the problem of stressed loans worth $207 billion, directing them at both new borrowers and also earlier ones looking for fresh funding.

Banerjee noted that lending companies are also including triggers for repayment in case of a downgrade occurring in the credit grades of borrowers. S&P’s Dangra highlighted that company founders are being asked to invest more to support their ventures rather than depending on bank financing.

The Reserve Bank of India has ordered banks to clear 50 of the largest defaulters in a year’s time.

Anil Ambani’s Reliance Communications Ltd., became the first company in India to default on U.S. dollar debt in past 15 months. Recently, a National Company Law Tribunal panel sent out a notice to Bhushan Energy Ltd., asking it to reply an insolvency plea filed by State Bank of India.

New Rules Introduced Under Bankruptcy Law

The new bankruptcy law rolled out by the current  government headed by Prime Minister Narendra Modi has been further tightened to prohibit founders from taking back control of firms that are being liquidated.

In cases where the founders are unable to pay overdue loan amounts and when the loan has been classified as non-performing for a year or more they are banned from purchasing their assets.

The President signed an ordinance making it into law with immediate effect last week

The recent government decision to pump in $32 billion as capital into state-owned banks is expected to enable lenders clean up their accounts and boost loan growth.

Rajesh Mokashi, managing director at CARE Ratings Ltd. said that lenders may ease up a little when the bankruptcy code becomes more effective and “demand for money picks up.”

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