India’s new bad bank faces a $27 billion debt mountain

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. 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 institution should assist speed up decision-making and boost bargaining leverage by storing poor loans from multiple lenders under one roof.

However, investors warn that in order for India to overcome its bad debt difficulties and stabilize 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 rules has been damaged as creditors’ recovery rates have declined, case closure times have lengthened, and liquidations have outnumber resolutions.

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 is important as a one-time clean-up effort of bad loans that have been pending resolution for years,” Raj Kumar Bansal, managing director of Edelweiss Assoc., said.

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. If the top nine cases by recovery are omitted, lenders only received 24% of dues, according to the data.

“India’s bankruptcy reforms started off well but they have slowed currently,” said Nikhil Shah.

For the time being, Indian banks will be content to relinquish part of their stressed loans to the proposed organization. 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 corona virus infections hit the country.

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