The Reserve Bank of India in February announced new rules for the banking sector, with the goal, according to the deputy governor N.S. Vishwanathan to improve India's credit culture and nip bad loan problems in the bud. Indian banks are sitting on a stressed assets pool of over Rs. 10 trillion, of which gross non-performing assets (NPAs) amount to Rs 8.86 trillion.
However when the RBI announced the new rules, bankers protested, asking for relaxations. The new bad loan rules are aggressive: they say that starting 1 March, lenders must implement a resolution plan within 180 days for loan accounts of at least Rs 2,000 crore, failing which the defaulting borrowers must be referred to insolvency courts. They also mandate banks to report defaults weekly to RBI, even if loan payments are delayed by a day.
The deputy governor has now ruled out any changes to the rules. The RBI is attempting to address the borrower incentive to take loans from banks compared with raising funds from markets. Vishwanathan pointed out that even a single day’s default on a bond would prompt markets to penalize the borrower heavily. The same regulatory environment currently does not exist with loans.