India Provides Creditors Path to Recover Loans From Insolvent Shadow Banks
An Indian five hundred rupee banknote is arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

India Provides Creditors Path to Recover Loans From Insolvent Shadow Banks

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(Bloomberg) -- India unveiled rules to help creditors recover loans due from large shadow lenders as a prolonged upheaval in the nation’s credit markets raises the risk of defaults by the financiers.

The amended law provides a generic framework for insolvency and liquidation proceedings of systemically important financial services providers, other than banks, according to a government statement on Friday. The 15-month-old credit crisis has choked economic growth to its slowest pace in six years, while company defaults on rupee bonds are at a record high.

Prime Minister Narendra Modi’s government is bolstering the rules after last year’s shock default at IL&FS Group reverberated across the nation’s financial system and led to delinquencies at other non-bank lenders, including Dewan Housing Finance Corp. and Altico Capital India Ltd.

The new framework could help with the resolution of cases such as Dewan Housing, according to analysts including Manish Shukla at Citigroup Inc. If such cases can be resolved faster, it will improve the flow of credit, they added in a note.

However, it remains to be seen how the new framework will deal with situations where multiple regulators are involved, the Citigroup analysts said, noting that both banks and mutual funds have exposure to Dewan Housing. That process would have to be approved by both the Reserve Bank of India and the Securities & Exchange Board of India, they said.

Here are some highlights of the amended rules:

  • Insolvency will be initiated on the application of the appropriate regulator
  • On admission, the adjudicating authority will appoint an individual proposed by the regulator
  • An interim moratorium shall start on and from the date of filing of the application till its admission or rejection by the authority
  • The license that authorized the firm to engage in business will not be suspended or canceled during the interim moratorium
  • Provisions of the moratorium process will not apply to any third-party assets or properties in custody or possession of the financial service provider
  • The administrator will take control and custody of third-party assets or properties in possession of the financial service provider

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