Raghuram Rajan Takes the Fight to Loan Defaulters: 10 Facts

Reserve Bank of India chief Raghuram Rajan has given banks more teeth to banks in their fight against loan defaulters. The central bank on Monday announced new guidelines for recovery of bad loans.

Here is a 10-Point Cheat-Sheet

1) The Reserve Bank of India (RBI) has allowed banks to take control of a defaulting company if a debt restructuring fails and change the management of the company.

2) Under the new rules, banks can convert their debt into equity in case of failure of restructuring plan.

3) Banks under joint lenders forum can become majority owner in the defaulting company by holding 51 per cent or more stake.

4) "As a policy direction, it is a good move. It instills a sense of fear of compliance in the borrowers and the stake for him to perform responsibly increases," says Diwakar Gupta, for MD and CFO of State Bank of India.

5) For the new norms to be applicable, banks need insert a clause mentioning whether the loan can be converted into equity in favour of the lenders, if the borrower fails to achieve certain targets.

6) The central bank, under governor Raghuram Rajan, has taken many steps to empower lenders recover money from defaulters. Dr Rajan described wilful defaulters as "freeloaders" who needed to be chastised for not honouring their debt commitments.

7) The RBI said that the lenders should divest their holdings in the equity of the company as soon as possible. And the 'new promoter' should not be a person/entity from the existing promoter/promoter group.

8) The new promoters should acquire at least 51 per cent of the paid up equity capital of the borrower company. If the new promoter is a non-resident, and in sectors where the ceiling on foreign investment is less than 51 per cent, the new promoter should own at least 26 per cent of the paid up equity capital or up to applicable foreign investment limit, whichever is higher, the RBI said.

9) Lenders who acquire shares of a listed company under a restructuring will be exempted from making an open offer, the RBI said.

10) Indian banks are struggling under high levels of bad assets. The gross non-performing assets (NPA) is expected to rise to Rs 4 lakh crore in this current fiscal, credit rating firm Crisil recently said.