Rising global rates may dampen overseas interest in stressed assets

K Ram Kumar | | Updated on: Jun 28, 2022
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Experts flag sharp reversal in capital flows, with FPIs pulling out equity and debt investments

The bad loans resolution scenario in the country may turn lacklustre as rising interest rates in advanced economies could prompt prospective overseas resolution applicants/ investors to withhold asset purchases/investment in security receipts, according to industry experts.

They highlighted the sharp reversal in capital flows, with foreign portfolio investors (FPIs) pulling out equity and debt investments aggregating about $29 billion in the current calendar year so far, as several countries tightened their monetary policies to rein in inflationary pressures.

The reversal of capital flows due to safe haven considerations could negatively impact the sentiment of foreign entities wanting to invest in distressed assets, said a top official of an asset reconstruction company (ARC).

The committee to review the working of ARCs had underscored that significant foreign capital is needed to resolve bad loans in the financial system.

FPIs/ foreign institutional investors’ (FIIs) subscription to the security receipts (SRs) issued by ARCs had jumped from ₹151 crore (1.02 per cent of the amount of SRs issued) as at March-end 2019 to ₹8,750 crore (14.74 per cent) as at March-end 2020 and ₹9,861 crore (14.08 per cent) as at March-end 2021, as per RBI data.

The central bank’s report on ‘Trend and Progress of Banking in India 2020-21’ noted the preference of banks for alternative avenues for resolution of stressed assets (such as cases admitted by National Company Law Tribunals under the Insolvency and Bankruptcy Code), with asset sales declining as a proportion of outstanding gross non-performing assets (GNPAs) across bank groups.

“This was partly due to the worsening acquisition cost of ARCs as a proportion of book value of assets, reflecting higher haircuts and lower realisable values in respect of their acquired assets,” the report said.

Experts opined that the tightening global financial conditions could dampen the enthusiam of foreign entities to buy stressed assets.

The latest Financial Stability Report observed that the longer bad loans remain on banks’ balance sheets, the lower the likelihood of recovering, independent of the type of exposure or borrower.

This implies that reduction in the median gap between bad loan identification and Corporate Insolvency Resolution Process (CIRP) commencement may have a pronounced effect on ultimate recovery, it added.

Published on June 28, 2022
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