After Huarong Woes, India Bad Bank to Keep Tight Cap on Debt
A cashier examines Indian rupee banknotes. (Photographer: Dhiraj Singh/Bloomberg)

After Huarong Woes, India Bad Bank to Keep Tight Cap on Debt

India’s planned bad bank will keep a tight leash on its own debt financing, according to a top official of the association helping to finalize the details.

The asset reconstruction company will keep its debt to equity ratio at 1:1, according to Sunil Mehta, Chief Executive of the Indian Banks’ Association, which is helping with plans for the soured loan manager. The entity is going under the working name of National Asset Reconstruction Co. Ltd., Mehta said.

The entity may be operational by the end of June, according to a person with the matter who asked not to be identified.

India unveiled its plan to set up a firm to manage banks’ bad debt in February, to help lenders already struggling with one of the world’s worst bad loan ratios as they also grapple with the fallout from the Covid-19 pandemic. The firm will hold stressed assets -- bad loans, restructured debt and advances to companies that can’t service their debt -- which can be sold on to investors at a reduced price.

China Experience

Just two months after India unveiled its plans, concerns about the financial health of major Chinese bad bank China Huarong Asset Management Co. began mounting after it failed to release 2020 results by a March 31 deadline. That’s increased scrutiny on the financial health of such institutions globally. Huarong’s ratio of total liabilities to equity was 9.3 times in its results for the six months ended June 30, 2020.

India’s bad bank won’t be based on the China experience, Mehta said. Still, the problems surrounding Huarong are prompting an additional layer of caution, the person familiar with the plans said.

The bank will only be allowed to raise debt from equity stakeholders by issuing them debentures rather than borrowing from the market, to reduce any default risks, the person said. There will be about 10-12 state and private banks as equity stakeholders, they said.

The bad bank will purchase soured loans by paying 15% of the value it and the lenders have agreed for them. It will cover the remaining cost by issuing securities to the banks linked to the eventual cash recoveries from the underlying assets, according to the person.

These securities will need to be redeemed within five years, which means a resolution of the underlying debt must be completed by that time, the person said. That compares with the eight years that the banking regulator permits for distressed debt managers in such cases.

A representative for the IBA declined to comment on all of the details and timing of the bad bank.

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