A bad bank in India expected to launch this month may help reduce one of the world’s worst bad loan piles, but market participants say it is a long way ahead.
The new institution, which will begin operations in late June, is likely to handle stressed debt worth 2 trillion rupees ($ 27 billion) over time, according to a report by BloombergQuint. That would be roughly a quarter of the country’s bad debt load. By housing the bad loans of many lenders under one roof, the entity should help accelerate decision-making and improve bargaining power when resolving these assets.
But for India to overcome its struggles with bad debts and stabilize the financial system of Asia’s third-largest economy, more fundamental issues must be addressed with insolvency laws introduced in 2016, investors say. Their confidence in the country’s bankruptcy reforms has suffered as creditors’ recovery rates fall, delays in closing cases increase, and settlements pass insolvency court rulings.
Market participants will observe if the bad bank is focused on actually solving the assets rather than keeping them as a warehouse, and if its team includes appropriate experts in the industry and change.
“The proposed bad bank is useful as a one-time clean-up exercise for bad loans that have been pending resolution for years,” said Raj Kumar Bansal, managing director of Edelweiss Asset Reconstruction Co., a solution for dealing with stressed assets. ”He said, adding that bankruptcy reform is key.
Fewer than one in 10 companies admitted to insolvency courts is resolving, while a third are facing liquidation, data compiled by the Insolvency and Bankruptcy Board of India shows. Recoveries for financiers from resolved cases have also dropped to 39% of quotas in March from 46% the previous year. And if you exclude the top nine cases for repossession, the lenders received only 24% of the installments, according to Macquarie Capital.
“India’s bankruptcy reforms started well, but have slowed down today,” said Nikhil Shah, Managing Director of Alvarez & Marsal India. “Long delays in resolutions, lengthy court battles and the uncertainty of recoveries after the approval of resolution plans are driving many potential investors away” from the bankruptcy process, he said.
Shah expects the ruling delays to get even worse unless the government and judiciary address some of the main issues, for example increasing the number of judges and investing in digital infrastructure to boost productivity.
The Banking Association of India, which is helping with plans for the proposed bad bank, and the Bankruptcy and Insolvency Board of India, did not immediately respond to emails seeking comment.
For now, Indian banks will be happy to finally phase out some of the distressed loans to the proposed entity. The sector’s bad loan ratio is forecast to nearly double to 13.5% of total gains by the end of September, India’s central bank said in a report released before the second wave of coronavirus infections hit the country.
“Stressed loans have taken too long to manage across the industry in recent years,” Prashant Kumar, CEO of Yes Bank Ltd. told Bloomberg. credit growth ‘.
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