A $27 billion pile of stressed debt looms over India's new bad bank

 The new institution, which is set to start operations by end of June, is likely to handle stressed debt worth $27 billion over time, which would be about a quarter of the non-performing debt load

A bad bank in India that’s expected to launch this month 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 June, is likely to handle stressed debt worth 2 trillion rupees ($27 billion) 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 as a warehouse and whether its team includes appropriate industry and turnaround experts.

“The proposed bad bank is useful as a one-time clean-up exercise of the bad loans that are pending resolution for years now,” said Raj Kumar Bansal, managing director at Edelweiss Asset Reconstruction Co. “But it’s not a long-term solution in dealing with the stressed assets,” he said, adding that bankruptcy reform is key.