Shaktikanta Das
Shaktikanta Das, governor of Reserve Bank of India (RBI), says banks will have the needed leeway to do what they can to extend loan payment schedules of clients. But they will also need to watch out for the pile of bad debts the sector continues to pile up. Image Credit: Bloomberg

Mumbai: New measures to allow Indian lenders to restructure loans will provide a "durable" resolution for cash-strapped businesses and help revive the economy, according to the central bank's chief.

"On one hand, health of banks is very important, and on the other hand businesses are under a lot of stress due to covid," Reserve Bank of India Governor Shaktikanta Das Das said. The plan has replaced a blanket loan moratorium that's due to expire later this month.

Das said the moratorium was a "temporary solution" for lockdown and not a permanent fix.

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Indian authorities are looking to support an economy that's been hit hard by the coronavirus, while ensuring the stability of a financial sector where bad-debt is set to swell to a two-decade high. Banks are struggling to accelerate credit growth to revive the economy, which is set for its first annual contraction in more than four decades.

Pandemic adds to pile

Lenders are also dealing with a pile of bad debt that was high even before the pandemic.

"We are trying to ensure that such businesses can get some regulatory help via banks on the loans that they have taken," Das said. "That will help the businesses to revive, jobs will be saved and in turn will help in economic revival."

Addressing concerns that there could be a spike in bad loans once the six-month loan repayment freeze ends on August 31, Das said banks will be able to extend or provide a new moratorium to borrowers under the new plan.

Details on the eligibility criteria for companies will be announced by September 6 after an expert panel considers the financial parameters and banks will be able to internally identify the accounts they would like to restructure, Das said.

"We will win this war against pandemic," he said. "I don't know how much time it will take but we will definitely win this war against COVID-19."