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| 1 minute read

Throwing Good Money After Bad?

An interesting method from India's government in seeking to address issues arising from an estimated USD 100 billion of bad debt on the books of India's commercial banks. The plans involve a combination of a state owned purchaser of the bad debt to operate in tandem with a partly privately owned company whom will attempt to sell off the assets of the distressed companies (with the incentive being that the government will pay the difference between the expected value of assets and what they are able to realise them for).

The difficulties with a more laissez-faire approach are that it can prove difficult to persuade banks to tackle bad debts on their balance sheets, with some preferring to wait it out in the hope that the market improves and their potential losses are thus minimised or, in the best cases, even turn into profits. Whilst such banks may appear to be balance sheet rich, the realisable value of their assets may prove for far grimmer reading.  The unrealised reality can also tend to manifest itself in a reticence to further lending, which can stifle economic growth.  

However, simply having the state bail-out flailing banks (with more than USD 35 billion of Indian taxpayers' money having been applied between 2005 and 2009 alone) has not cured the ailment.  This points to the need for more systemic reconstruction to allow for a lending culture far more attuned to the importance of suitably tailored due diligence and informed analysis of risk - without this, state-led injections of capital (even with the nuanced approach being pursued by India's government) could be throwing good money after bad.            

"Banks are usually skilled in lending but not recovery and resolution of bad loans."


reconstruction, bad debt, distressed companies, restructuring and insolvency