New Delhi: Bad banks in India which are expected to be launched this month can help reduce one of the worst bad loan piles in the world but market participants say it is a long road ahead.
The new institution, which is set to start operations at the end of June, is likely to handle stress debt worth Rs 2 Lakh Crore ($ 27 billion) from time to time, according to the Bloombergquint report.
It will be about a quarter of the country’s non-performing debt burden.
With bad loan housing of many lenders under one roof, the entity must help accelerate decision making and increase bargaining power when completing these assets.
But for India to overcome its struggle with poor debt and stabilize the third largest economic financial system in Asia, a more fundamental problem with the bankruptcy law introduced in 2016 it needs to be overcome, said investors.
Their trust in the country’s bankruptcy reform has been shaken as a falling creditor recovery rate, delay in increased closing cases, and liquidation exceeds the resolution in the bankruptcy court.
Market participants will watch whether malicious banks focus on actually completing assets rather than keeping them like warehouses, and whether their team covers the right industry and tourist experts.
“The proposed Bad Bank is useful as a one-time cleaning training from a bad loan that is waiting for resolutions for years now,” said Raj Kumar Bansal, Managing Director at Edelweiss Asset Reconstruction Co.
“but it is not a long-term solution in dealing with stress assets, “He said, adding that bankruptcy reform was the key.
Less than one in 10 companies received at the bankruptcy court will be resolved while the third facing liquidation, data compiled by bankruptcy and the Indian bankruptcy council shows.
Recovery for investors from the cases completed also fell to 39% of contributions in March from 46% per year earlier.
And if nine top cases with excluded recovery, lenders only receive 24% of contributions, according to Macquarie Capital.
“Indian bankruptcy reform begins well but they have slowed at this time,” said Nikhil Shah, Managing Director at Alvarez & Marsal India.
“Prolonged delays in resolution, a long court battle, and uncertainty after post-approval resolution plans to encourage many potential investors” from the bankruptcy process, he said.
Shah estimates the delay in resolution to deteriorate further unless the government and justice discusses some of the main problems, with for example increasing the number of judges and investing in digital infrastructure to increase productivity.
The Bank India Association, which helps with plans for the proposed evil banks, and bankruptcy and the Council of Bankruptcy, does not immediately respond to emails that are looking for comments.
For now, the Bank will be happy to finally kick several stress loans to the proposed entity.
The ratio of loan loans this sector is set to almost doubled 13.5% of the total progress at the end of September, the central bank said in a report published before the second wave of Coronavirus infection hit the country.
“Stress loans have taken too much time management throughout the industry in recent years,” Prashant Kumar, Chief Executive Officer at Yes Bank Ltd, to Bloomberg.
“This bad bank will help shift the focus of completing acid loans to increase credit growth.”