bank-stress
Economy

India’s new bad bank is looming over a $27 billion mountain of stressed debt

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The new organisation, which is expected to begin operations by the end of June, is expected to handle $27 billion in stressed debt over time, accounting for roughly a fifth of the non-performing loan load.

A bad bank slated to open this month in India could help lower one of the world’s worst bad-loan piles, but market participants believe it will be a long road ahead.
According to a BloombergQuint storey, the new agency, which is expected to begin operations by the end of June, will likely handle stressed debt worth 2 trillion rupees ($27 billion) over time. That’s over a quarter of the country’s non-performing debt. The entity should help speed up decision-making and boost bargaining power when resolving these assets by storing poor loans from many lenders under one roof.

However, investors warn that in order for India to overcome its bad debt difficulties and stabilise the financial system of Asia’s third-largest economy, more fundamental issues with insolvency legislation adopted in 2016 must be solved. Their faith in the country’s bankruptcy reforms has been damaged as creditors’ recovery rates have declined, case closure delays have increased, and liquidations have outpaced insolvency court resolutions.

Source: insolvency and bankruptcy board of india

Market participants will be watching to see if the bad bank concentrates on resolving the assets rather than holding them in a warehouse, and if its team comprises industry and turnaround professionals.

“The proposed bad bank will be good as a one-time clean-up effort of bad loans that have been pending resolution for years,” Raj Kumar Bansal, managing director of Edelweiss Asset Reconstruction Co., said. “However, it is not a long-term answer for dealing with stressed assets,” he stated, emphasising the importance of bankruptcy reform.

According to data published by the Insolvency and Bankruptcy Board of India, less than one out of every ten enterprises admitted to the insolvency courts is resolved, while a third faces liquidation. In March, recoveries for financiers from settled claims fell to 39 percent of dues, down from 46 percent a year earlier. According to Macquarie Capital, lenders received only 24% of dues if the top nine instances by recovery are eliminated.

“India’s bankruptcy reforms got off to a good start, but they have stalled now,” said Nikhil Shah, managing director of Alvarez & Marsal India. “Long delays in resolutions, protracted court fights, and the uncertainty of recoveries post-approval of resolution plans are scaring away many potential investors,” he said.

Shah believes that unless the government and judiciary address some of the core issues, such as expanding the number of judges and investing in digital infrastructure to enhance efficiency, the delays in resolutions would grow.

The Indian Banks’ Association, which is assisting with the potential bad bank’s preparations, and the Insolvency and Bankruptcy Board of India did not immediately respond to requests for comment.

source: reserve bank of india

For the time being, Indian banks will be content to relinquish part of their stressed loans to the proposed organisation. The bad-loan ratio in the banking industry is expected to nearly double to 13.5 percent of total advances by the end of September, according to a research released before the second wave of coronavirus infections hit the country.

“In the last couple of years, stressed loans have occupied much too much management attention throughout the industry,” Prashant Kumar, chief executive officer of Yes Bank Ltd., told Bloomberg. “This bad bank will assist in shifting the focus away from addressing sour loans and toward increasing credit growth.”

The article was originally published here

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