India’s ‘Bad bank’ to clean up $27bn of the debt mountain

India's 'Bad bank' to clean up $27bn of the debt mountain
The clutch of banks is saddled with bad loans to the tune of tens of billions of dollars after years of injudicious lending to failed projects.

New Delhi — With over 150,000 branches, and $2tn in deposits, serving over a billion customers, India’s banks look impressive on paper. Still, In reality, they are in a mess, says a BBC report on Thursday.

The clutch of banks is saddled with bad loans to the tune of tens of billions of dollars after years of injudicious lending to failed projects. State-owned banks account for over 60% of the bad debt. Five Indian banks have been rescued from collapse since 2018.

Bad loan recoveries have traditionally been low — up to a third of total loans only, and now, borrowers hit by the pandemic could default further, adding to the soaring debt in the coming months.

Over $35bn of taxpayers’ money was injected to revive the ailing banks between 2005 and 2009 alone. However, Fitch Ratings has said India’s struggling banks need a $15bn-$58bn infusion of new funds by 2022.

Now the government plans to float a long-talked-about “bad bank” that will try to tame $27bn of bad loans and clean up commercial banks’ balance sheets.

This $27bn is a quarter of India’s estimated $100bn of bad loans undermines growth; private investments have nosedived as risk-averse banks are unwilling to lend freely.

As an asset reconstruction company, a “bad bank” typically buys bad loans from affected banks and liquidates the assets offered by borrowers as securities against loans.

India has launched 28 such firms in the past two decades, all privately owned, but recoveries have been underwhelming.

The task in hand for the ‘Bad Bank” will not be easy; the biggest hurdle will be to get the banks to agree on valuations.

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