IBC resolution slow and ‘skewed’, rising NPAs and low credit offtake deter private investment, ADB economists tell
The Asian Development Bank (ADB) said the success of India’s latest move to clean up the banking system’s toxic assets through a ‘bad bank’ will depend on a number of factors, and global evidence suggests that recapitalization of banks Initiatives like this work better with .
The bank has said that India’s resolution process under the Insolvency and Bankruptcy Code (IBC) remains “skewed” and its Asian development concerns over rising non-performing loans (NPLs) and low offtake of bank credit restricting private investment. The concern was raised last time in Outlook update. Week.
ADB’s Rana Hasan and Shalini Mittal said IBC has marked a paradigm shift in the resolution process, with faster and more efficient resolutions critical to improving resource allocation in the economy, ADB’s Rana Hasan and Shalini Mittal said Hindu. Mr. Hassan is the Bank’s Regional Economic Adviser for South Asia and Ms. Mittal is an Associate Economic Analyst.
The government has already taken measures to expedite the resolution of bad loans through National Asset Reconstruction Company Limited (NARCL), which will reduce the stress on the balance sheets of banks and enable them to solve the dual balance sheet problem of banks. Will try Direct resources to more productive assets, he noted.
While NARCL can ensure that NPLs are resolved in a time-bound, efficient manner under expert guidance, ADB economists cited global experience with such entities and said several factors would be important in determining its success.
“Many countries have set up such companies in the past to resolve NPLs. Established in Korea in 1997, KAMCO has been instrumental in achieving and resolving bad debt and corporate restructuring of financial institutions. Similarly, Danharta in Malaysia had a lifetime loan recovery rate of 58%,” he pointed out.
“Also, recapitalization of banks will help strengthen the balance sheets of banks, improve capital adequacy ratio and encourage banks to lend more, thereby improving credit flow in the system. Evidence from 135 major banks in 15 EU countries and Switzerland shows that segregation of bad assets (in a bad bank) works alongside recapitalization of banks,” Mr. Rana and Ms. Mittal emphasized.
He said that the latest Financial Stability Report of Reserve Bank of India (RBI) also mentioned other key factors for the success of NARCL. These include fair pricing of loans, divestment of risk from selling to banks, infusion of capital from the private sector as well as independent and professional management of the new entity. Reducing moral risk and adequate capitalization of banks will also be important for promoting fresh lending after asset sales.
“The central bank is likely to continue its liberal stance and support the economy through liquidity measures and reforms in the financial industry. However, there is a need to make the resolution process for stressed assets more efficient in order to improve credit flow to support domestic investment,” ADB had emphasized. It said, “Excluding the two large recoveries, only 31% of the defaulted assets have been recovered.”
According to RBI, the bad debt ratio in the banking system is expected to rise to 9.8% by March 2022, from 6.8% in December last to 7.5% in March 2021. New project announcements in the first quarter of 2021-22 were just 44.3% of pre-pandemic levels, with only 0.3% of projects outstanding, the ADB update reported.
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