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India empowers central bank to deal with $150 billion bad debt

STORY: India tweaked its laws to help tackle the record $150 billion in troubled bank debts, giving its central bank greater power to identify and enforce resolution on specific soured loans, said Finance Minister Arun Jaitley on Friday (May 05).

In an executive order that alters India’s Banking Regulation Act, the government authorized the Reserve Bank of India to direct banks to initiate an insolvency resolution process in the case of a default under provisions of the bankruptcy code.

Jaitley said the law was necessary as so far the measures had had little impact.

The ordinance, which goes into effect immediately, also said the Reserve Bank of India (RBI) may specify one or more authorities, or panels to advise banks on resolution of stressed assets.

The move marks the latest attempt to tackle the record 9.64 trillion rupees ($150 billion) in stressed loans accumulated as of the end of December that have choked new credit and hurt economic growth.

State-run lenders, who dominate India’s banking sector, carry the bulk of the soured debt. Bankers, however, have been reluctant to decide on haircuts or move on resolutions rapidly for fear of being charged by law enforcement agencies on write-offs taken by them.

Bad debt rose as huge loans to sectors such as infrastructure came undone after sections of the economy came to a standstill following the 2008 global financial crisis.

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