Nirmala Sitharaman: Sitharaman bad bank management plan raises concerns that loan prices are inflated

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India’s decision this week to create a bad bank to handle one of the world’s largest piles of bad loans could have 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 failed bank reduces the pressure on loan holders to price 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. Banking Secretary Debasish Panda told reporters this week that banks may need to invest 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 that has risen in recent years and attract investors from Oaktree to Apollo.

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

Aggregating degraded assets into a single firm could help accelerate India’s oft-protracted debt restructuring 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 bad bank’s plan, the need to find a buyer for the distressed loans would remain, Bansal said.

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