India: A USD27bn Pile of Debt Looms Over India’s New Bad Bank

  • A bad bank in India that’s expected to launch in Jun 21 may help reduce one of the world’s worst bad-loan piles but market participants say it’s a long path ahead.
  • The new institution, which is set to start operations by the end of Jun 21, is likely to handle stressed debt worth INR2tr (USD27bn) over time, according to a BloombergQuint report. That would be about a quarter of the nation’s non-performing debt load. By housing bad loans of many lenders under one roof, the entity should help speed up decision-making and improve bargaining power when resolving these assets.
  • But for India to overcome its struggles with bad debt and stabilize the financial system of Asia’s third-largest economy, more fundamental problems with insolvency laws introduced in 2016 need to be addressed, investors say. Their confidence in the country’s bankruptcy reforms has been shaken as creditors’ recovery rates fall, delays in closing cases increase, and liquidations exceed resolutions in the insolvency courts.
  • Market participants will be watching whether the bad bank focuses on actually resolving the assets rather than keeping them like a warehouse, and whether its team includes appropriate industry and turnaround experts.
  • Less than one in 10 companies admitted in the insolvency courts is getting resolved while a third are facing liquidation, data compiled by Insolvency and Bankruptcy Board of India show. The recoveries for financiers from the resolved cases have also dropped to 39% of dues as of Mar 21 from 46% a year earlier. And if the top nine cases by recovery are excluded, lenders received just 24% of dues, according to Macquarie Capital.
  • For now, Indian banks will be happy to finally kick away some of the stressed loans to the proposed entity. The sector’s bad-loan ratio is set to almost double to 13.5% of total advances by the end of Sep 21, India’s central bank said in a report published before the second wave of coronavirus infections hit the country.
  • Lenders are also looking at two other recent measures to speed up cleaning their books — pre-packaged insolvency and personal bankruptcy. The rules introduced in Apr 21 on ready-made insolvencies allow banks to negotiate settlement of dues in small- and medium-sized firms to avoid court delays in clearing bad loans in that sector, which is among the worst hit due to the pandemic restrictions.
  • Banks can also file simultaneous bankruptcy cases against a defaulting company and its owners that guaranteed the loans after a ruling by India’s top court in May 21.

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