The new institution, which is set to start operations by the end of June, is likely to handle stressed debt of Rs 2 lakh crore ($27 billion) over time, BloombergQuint reports.
This would be about a quarter of the country’s non-performing debt burden. By housing the bad debts of multiple lenders under one roof, the entity should help expedite decision making and improve bargaining power while resolving these assets.
But for India to overcome its struggle with bad debt and stabilize the financial system of Asia’s third-largest economy, more fundamental problems need to be addressed with insolvency laws introduced in 2016, investors said. Is said.
His confidence in the country’s bankruptcy reforms has been shaken as creditors’ recovery rates have plummeted, delays in closing cases are increasing, and liquidations exceed resolutions in bankruptcy courts.
Market participants will have to see whether Bad Bank really focuses on solving assets rather than warehousing them, and whether its team includes appropriate industry and turnaround experts.
Raj Kumar Bansal, managing director, Edelweiss Asset Reconstruction Company, said, “The proposed bad bank is useful as a one-time clean-up of bad loans, which are pending for years now.”
“But it is not a long-term solution in dealing with stressed assets,” he said, adding that bankruptcy reform is important.
One in 10 companies admitted to insolvency court are being resolved, while a third is facing liquidation. Insolvency and Bankruptcy Board of India Display.
The recovery of financiers from resolved cases has also fallen to 39% of dues as of March from 46% a year ago. And if the top nine cases of recovery are excluded, lenders received just 24% of the dues, according to Macquarie Capital.
Nikhil Shah, managing director, Alvarez & Marsal India, said, “Insolvency reforms in India have started well, but are currently at a slow pace.”
“Prolonged delays in resolutions, protracted court battles, and the uncertainty of recovery after approval of resolution plans are driving many potential investors away from the bankruptcy process”, he said.
Shah expects proposals to get delayed until the government and judiciary address some of the primary issues, for example increasing the number of judges and investing in digital infrastructure to boost productivity.
The Indian Banks Association, which is helping with the plans for the proposed bad bank and the Insolvency and Bankruptcy Board of India, did not immediately respond to an email seeking comment.
For now, banks will be happy to finally clear some stressed loans to the proposed entity. The sector’s bad loan ratio has nearly doubled to 13.5% of total advances by the end of September, the central bank said in a report published ahead of the second wave of coronavirus infections in the country.
“Stressed loans over the years have taken a lot of management time across the industry,” Prashant Kumar, CEO, Yes Bank Ltd, told Bloomberg. “This will help the bank focus on improving credit growth by resolving bad loans.”
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