Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

(Updated )

India's bad-loan crisis, afflicting almost 20 percent of banks' assets, has moved tantalizingly close to a resolution. Giving the central bank the power to force lenders to shed soured debt is a welcome policy move. But a nine-month target to clear 60 large corporate delinquencies may be wishful thinking.

The reason is an untested bankruptcy court. That's a risk investors aren't paying enough attention to, in their rush to buy Indian bank stocks.

On Steroids
Indian bank stocks have outperformed counterparts in developed and developing economies this year
Source: Bloomberg
*In U.S. dollar terms.

The Reserve Bank of India can, under powers given to it by a new law, "issue directions to any banking company to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016." 

Note that the bankruptcy code is just a year old, and the tribunal that will decide insolvency cases isn't ready to handle the 57 or so major stressed debtors that, by the government's own calculations, would require haircuts of 75 percent or more to become healthy again.

The Three Scores of Misery
As many as 60 publicly traded companies have too little profit to service their combined $129 billion in net debt
Source: Bloomberg
*With net debt in excess of $500 million and latest quarterly earnings before interest and tax less than interest payment.

Assume that the new RBI secretariat formed to oversee the handling of troubled assets conscientiously nudges banks to hand over these cases to the tribunal. What happens next? As of last month, the National Company Law Tribunal was looking for four judges and 12 technical members, all of whom are required to be at least 50 years old with 10 years of legal or 15 years of accounting practice behind them. Five years spent adjudicating labor disputes is also acceptable.  

The emphasis is thus on age and not experience, which, as BloombergQuint pointed out recently, continues the tradition of India's ineffectual (and now wound up) company law board.

That's only part of the problem. The new tribunal will handle not only the law board's case load, but the winding-up petitions now processed by high courts, plus all the debt recovery suits currently in front of an older institution that's being downgraded to deal with only individual insolvencies.

That's tens of thousands of disputes. The docket of the tribunal's main branch in Delhi shows 46 listings for 10:30 a.m. on Monday. Only six of these are going to test the new bankruptcy law. The rest is all old stuff.

Mind the Legal Productivity Gap
Indian debt-recovery judges clear just 12 percent as many cases in a year, on average, as their U.S. bankruptcy counterparts
Source: Alvarez & Marsal

According to a study by professional services firm Alvarez & Marsal, a debt-recovery judge in India clears 360 cases a year on average, compared with 2,895 by his counterpart in a U.S. bankruptcy court. In other words, the RBI's efforts to ease strains in Indian corporate debt are likely to confront an already overburdened, ill-equipped, under-staffed, inexperienced judicial bureaucracy with a history of poor productivity.

The pressure to handle the top 60-odd cases out of the top 100 stressed debtors, which represent the bulk of India's $180 billion bad-debt challenge, will either fashion the tribunal into a robust new institution and lead to a permanent upgrade in the nation's abysmal "ease-of-doing-business" rankings, or it will see the new system wilt. The creditor-friendly law is supposed to pave the way to liquidation in 270 days.

The good news is that the government, as the owner of the country's largely state-dominated banking system, seems eager for a solution. Or at least that's the signal it has sent by changing the CEOs of seven state-run banks at the same time that it empowered the RBI to clean up the bad-debt mess. New bank bosses will be more likely to cut losses on their predecessors' mistakes, provided the RBI gives them protection from prosecution and the government assures them of fresh capital. 

Yet the 30 percent surge this year in the benchmark index of Indian bank shares in dollar terms presents a risk. The bad-debt surgery may well turn out to be life-saving. After providing for soured credit, 77 percent of the banking system's assets would be with weak lenders -- those that have Tier 1 capital ratios of less than 10 percent, according to the International Monetary Fund.

But given what we know about Indian bureaucracy, and delays in the judicial system, the operation won't be as quick, easy or painless as investors are anticipating.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Adds data on banking system assets post-provisions in the second-last paragraph.)

  1. Hopefully, the 65 vacancies the company law tribunal advertised a month earlier -- for court officers to typists -- have been filled, and the court's headquarters in New Delhi has selected its tech support vendor for the phone lines.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net