India moves against rising restructured debt risk

Orders banks to boost reserves to 5% from 2.75%.

The Reserve Bank of India has ordered banks to boost reserves against restructured debt in another effort to shield its financial system from loan defaults after the slowest economic growth in a decade amid Asia’s highest funding costs.

It believes tighter regulations will force banks to adopt stricter lending practices, helping curb increases in bad debt.

RBI is tightening regulations to shore up banks’ asset quality after non-performing debt as a proportion of total lending rose to 3.7% in December, the highest in five years.

Restructured loans, which allow companies a moratorium on payments, longer maturities or lower interest rates to avoid defaults, more than doubled in the year ended March 2012 to US$38.9 billion, according to Moody’s.

Fitch said this step by the central bank is in the right direction and should bring about a positive change in the way in which lending is done in India. Lenders will take appraisal of projects more seriously and will monitor disbursed loans in a more disciplined manner now.

In April, Prime Minister Manmohan Singh directed state-run lenders to slash gross bad loans to 1% of total assets by March 2014 from 4.1% in September.