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Banks may have to write-off 40-70 per cent of bad loan exposure in 240 companies in the steel, construction, power and textile sectors to bring their loan book to a sustainable level, according to a joint study by Assocham and India Ratings and Research.
“These haircuts naturally present a problem for banks, given their already constrained capital position,” said the study, adding that a mix of measures such as recognition of sustainable debt, and the ability to bring third-party investors in Security Receipts (SR) could help in the revival of distressed companies.
Further, with bad debts mounting to ₹6 trillion (₹6,00,000 crore), the study has called for a reorientation of asset reconstruction companies (ARCs).
“The current capital position of ARCs can at most take care of 10 per cent of the bad debt in the Indian banking system,” it said, adding that a debt-led strategy for investing in SRs that resulted in the leverage of more than two times the equity created liquidity issues for ARCs and was not coherent with the long gestation period for recovery in India.
The study also pins its hopes on the adoption of the Insolvency and Bankruptcy Code to streamline debt resolution. “An improved recovery at least in the 50-70 per cent range will be a real achievement of effective implementation of the code,” it said, adding that, at present, India is classified as a Group D country by Fitch with recoveries expected in the 30-50 per cent range.
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