Modi government’s bad bank plan raises concerns that loan prices are inflated

New Delhi: india move this week to create a bad bank to handle one of the biggest piles of aggravated loans could lead to unintended consequences.

One that some market participants say they will be watching closely is whether this could end up inflating the price of distressed assets. This could happen if the creation of the bad bank eased the pressure on loan holders to value those debts at discounts attractive enough to attract other buyers, the argument goes.

There are many details about the bad bank that policymakers have not clarified, including its ownership structure, which makes any analysis difficult. But if the business is owned by lenders, including those who generated bad assets bought at lower prices, it could force those banks to reduce the value of the securities they receive in exchange. Bank Secretary Debasish Panda told reporters this week that banks may have to put in upfront capital to start the bad bank.

While the plan offers a new avenue for resolving bad loans, key issues, including the bank’s capitalization, ownership structure, and limited secondary market for distressed assets, still need to be addressed, said Nitesh Jain, director. of CRISIL Ratings, the local branch of S&P Global Ratings.

Such problems with the transparency of bad loan pricing could reduce interest in distressed Indian credit which has increased in recent years and Oaktree investors in Apollo.

There would, of course, also be advantages to the bad bank management plan announced in the federal budget Monday.

Aggregating degraded assets into a single firm could help accelerate India’s oft-protracted debt restructurings and make it easier for foreign funds to build up controlling positions in corporate debt.

This would be an improvement over the current regime, under which investors must negotiate individually with each lender, resulting in debt resolutions that take longer than a year, said Ravi Kumar Bansal, CEO of Edelweiss Asset Reconstruction. , a troubled credit investor.

But even under the failing banks plan, the need to find a buyer for the distressed loans would remain, Bansal said.


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