A mountain of bad loans sitting on the balance sheets of state-run banks is choking India's economic prospects, fuelling calls for decisive policy move from New Delhi to put the country’s ailing state lender back to a strong footing.
Foreign investors, meanwhile, are excited at the prospect of acquiring bargain assets by seizing credit opportunities among India's $154 billion of soured loans.
They typically partner with a local securities firm in India to set up an asset reconstruction company as a way to work out the problem loans, or have a local team on the ground to source deals directly.
“We’re spending a lot of time in India both from a lending perspective and dealing with what is a very big NPL [non-performing loan] problem. It’s in the early stages of being proactively dealt with by regulators,” said Iifryn Carstairs of Varde Partners, a $12 billion global investment firm.
Another Hong Kong-based distressed debt investor told FinanceAsia local talents had an advantage in the distressed market in India because of their knowledge of local risks and operating conditions.
“The big issue is the pile of debt may never get repaid, and many of them are simply rolled over,” the investor said. “Many small funds won’t have the resources to deal with the wave of restructuring and legal proceeding in India.”
A dozen of the country's largest defaulters – with nearly a quarter of the total bad loans – have already been pushed into insolvency at the command of India's central bank. Bu industry players expect none of these cases to be resolved in the next six months.
Asia's third-biggest economy is still suffering the after-effects of a decision last year to pull two common banknotes out of the system, as well as the implementation this year of a general sales tax.
The economy expanded 5.7% in the three months to June, the slowest quarterly growth in three years and moderating significantly from 7.9% in the same quarter a year earlier.
A slowdown in economic growth is casting a chill over the government of Prime Minister Narendra Modi, who faces an election in 2019.
The piles of bad debt hinder the ability of lenders to get the economy moving again by lending, especially to small companies. The hefty stock of bad loans, which include non-performing assets and restructured loans, surged to almost Rs 10 lakh crore ($154 billion) in the end of 2016, up from Rs 8 lakh crore a year earlier, according to the Ministry of Finance.
According to Citi, bad debt represented 12% of total loans in the banking system, limiting the firepower of the state-sector banks to fund small companies that are vital to the real economy.
Under the hood, many of those bad loans were made to large conglomerates or corporates which can’t repay their principal or interest payments. One stark example is that of high-profile businessman Vijay Mallya, who has $1.3 billion worth of unpaid loans.
According to analysts’ estimates, banks holding bad debts can expect to receive 88 cents on a dollar in a base case scenario.
Industry such as steel manufacturing and metal mining continue to face pressure due to falling commodities prices.
The stress level in industry overall rose to 23% in March, up from 22.3% in September last year, according to the central bank data. Within the sub-sectors, almost half of the loans made to suppliers of basic metal and metal products are in trouble, followed by cement companies.
The bad-loans problem stems from bank lending to the country’s large corporates over the past decade in the areas such as steel and infrastructure. Many of those projects proved economically unviable or simply didn’t get government approval.
Between 2014 and 2016, the gross non-performing assets among Indian banks shot up by 135%.
As well as holding about 90% of the total bad debt, state banks are facing having to raise close to $60 billion of fresh capital to meet the Basel III regulatory regime by 2019, according to Fitch’s estimate.
