A $27 billion debt mountain looms over India’s new bad bank

A bad bank in India, which is slated to open this month, may help decrease one of the world's worst bad-loan piles, but market participants believe the road ahead is lengthy.

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A $27 billion debt mountain looms over India's new bad bank

A bad bank in India, which is slated to open this month, may help decrease one of the world’s worst bad-loan piles, but market participants believe the road ahead is lengthy. According to the Bloomberg Quint story, the news 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 equates to around a fourth of the country’s non-performing debt. By consolidating poor loans from several lenders under one roof, the business should be able to speed up decision-making and boost bargaining strength when it comes to resolving these assets.

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

Also Read: India’s Bad Bank Problems Persist; Laxmi Vilas Bank, The Latest in the List

Market participants will be watching to see if the bad bank focuses on really resolving the assets rather than just storing them and if its team comprises competent industry and turnaround experts. “The planned bad bank is important as a one-time clean-up effort of bad loans that have been undergoing resolution for years, “Edelweiss Asset Reconstruction Co. managing director Raj Kumar Bansal said “However, it is not a long-term answer for dealing with stressed assets.” He went on to say that bankruptcy reform is critical.

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 gets resolved, while a third is facing liquidation. Recoveries for financiers from settled claims fell to 39 percent of dues in March, down from 46 percent a year earlier. According to Macquarie Capital, lenders received only 24 percent of dues if the top nine instances by recovery are eliminated.

The Indian Banks’ Association, which is assisting with plans for the new bad bank, and the Insolvency and Bankruptcy Board of India did not reply quickly to requests for comment. For the time being, Indian banks would be relieved that some of the stressed loans have been transferred to the proposed organization. The sector’s bad-loan ratio is expected to nearly double to 13.5 percent of total advances by the end of September, according to a forecast released before the country’s second wave of coronavirus infections.

(News input: Livemint)

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A $27 billion debt mountain looms over India's new bad bank
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A bad bank in India, which is slated to open this month, may help decrease one of the world's worst bad-loan piles, but market participants believe the road ahead is lengthy.
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THE POLICY TIMES
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