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Moody's: India's revised bad loan resolution framework credit positive for banks

India's revised bad loan resolution framework is credit positive for banks as it provides a clear and time-bound process for resolving such loans, Moody's said.

The Indian central bank's revised guidelines require banks to file for insolvency proceedings against defaulters with loans of 20 billion rupees and more if a resolution plan is not implemented within 180 days from the date of the first default. Further, the central bank made the Insolvency and Bankruptcy Code 2016 the main tool for dealing with bad loans and withdrew prior resolution schemes, including the strategic debt restructuring scheme and the corporate debt restructuring scheme.

Moody's said it believes the revised guidelines provide a clearer and time-bound process for resolving bad loans and will prevent the buildup of such assets in the banking system. While weak asset quality is one of the key challenges of India's banking system, the growth of new problem assets in the system has slowed, the rating agency noted.

The Indian central bank has taken steps over the last few months to find a speedy resolution for growing bad loans in the banking system, including identifying large loan defaulters accounting for 60% to 65% of the banking system's bad loans.

As of Feb. 14, US$1 was equivalent to 64.07 Indian rupees.