A new law aimed at curbing debt consolidation in the banking sector has raised hopes of a turnaround in the Indian economy.
The National Debt Settlement (NDS) Bill 2017 has been tabled in the Lok Sabha and the government has set a deadline of February 20, 2019 to finalise the draft of the legislation.
It was passed on Thursday and now it is expected to be passed by Parliament within a few weeks.
In its current form, NDS will set up a debt settlement fund for borrowers with defaulted loans of over Rs 10 lakh, which will be available for repayment only on the basis of an independent assessment of the borrower’s assets and liabilities.
It is estimated that around 60% of borrowers have defaulted on their debts.
In a country where banks have struggled to cope with the fallout of demonetisation, NDIS will bring about a swift relief to millions of poor people and others facing debt burdens of more than Rs 1 lakh.
The bill also includes a mechanism for private banks to defer repayment of loan interest for up to one year, but no specific timelines have been set.
The NDIS fund will be used to ensure that the borrowers get their due and in the process repay their debts, according to the government.
The government has sought to set up three NDIS banks with a combined capacity of around Rs 5 lakh crore, including two private banks.
“The NDPS will help in curbing the debt consolidation crisis and also will be a source of solvency for the banks,” said the finance ministry.
“While this may not be enough to revive the economy, it will help a lot of people and banks will be able to restructure their loans without fear of the banks becoming insolvent,” said Nandanand Bhattacharya, a partner in London-based law firm Bhatticharya, and a member of the Financial Sector Advisory Board at PwC.
In a separate move, the government announced a three-month grace period for private lenders to pay down their debt by taking steps to transfer the debt to the NDIS bank.
According to the bill, any loan that has been deferred over a period of five years or more will be deemed to have been waived and will be returned to the borrower with full interest, except for interest that is charged on the amount.
The government is expected in the near future to make available up to Rs 1.5 lakh crore of private loans to banks to help them meet their debt commitments, which currently stand at over Rs 60,000 crore.