Reserve Bank of India may limit size of lender consortiums

Reserve Bank of India is considering a proposal that would limit the number of participants in a single lenders’ consortium, in a bid to encourage banks to carry out better independent credit checks and do more to chase rogue borrowers.

Reserve Bank of India Deputy Governor R. Gandhi told a conference on Tuesday that banks with small exposures assume less responsibility when loans sour – a major problem for India, as it seeks to tackle USD 50 billion of bad debt that’s slowing credit growth and hampering a broader economic recovery.

Banks, he said, need to act urgently to reduce stressed assets on their balance sheets.

“It is said that banks with very meagre share neither have the incentive nor the information to independently assess a proposal. They typically go by one who has the bigger share,” Gandhi told bankers and debt recovery firms.

“The suggestion is to have a regulatory limit on the number of members in a consortium, so that every member will have a serious independent credit appraisal and credit mindset.”

He added that the proposal could also have drawbacks, as it effectively restricts a bank’s freedom.

The central bank now needs to “thrash out” the proposal, which has come from various quarters, with stakeholders, Gandhi said on the sidelines of the Mumbai conference.

M.G. Vaidyan, a deputy managing director at the country’s largest lender, State Bank of India, called the proposal “a very good thing”.

“If there are 15 people, 20 people in the consortium, there is obviously a problem,” he said.

Gandhi’s comments come as both the central bank and the government push India’s banks to cut down bad debts and kickstart fresh lending.

In July, the government said it plans to inject USD 11 billion of capital into lenders over the next four years to help them clean up their balance sheets.

The RBI has taken steps over the past 18 months to help banks tackle bad and troubled loans, including provisions to swap debt for equity, which are designed to do more to hold defaulting owners and majority shareholders to account.