India has a brand new law at its disposal to help clean up $131 billion of impaired debt and avert

a crisis at its banks. Implementation challenges are so daunting that the full benefits may be
years away.
The law passed by parliament this month calls for the creation of a Bankruptcy Board, which
will regulate a new class of insolvency professionals. It also requires adjudication by two
agencies: a National Company Law Tribunal, which has yet to be set up, and the Debt Recovery
Tribunals, which had 62,000 cases pending as of December 2014 and a disposal rate of about
10,000 cases per year, according to PRS Legislative Research.
Prime Minister Narendra Modis stimulus push has been thwarted by slowing credit growth as
banks turn cautious after their impaired assets swelled to about 14% of their total lending as of
30 September. The average Indian bankruptcy case now lasts four years, more than twice as long
as in the US, and investors recover about 26 cents on the dollar, versus 80 cents in America, the
World Bank estimates. The headaches investors face in chasing down defaulters has prompted
Western Asset Management to give Indias junk bonds a cold shoulder.
Big hurdle
The sooner India can implement its new bankruptcy law, the better it will be for everyone, said
Wontae Kim, research analyst at Western Asset Management in Singapore, which manages $436
billion of assets. The actual implementation versus the idea is going to be the big hurdle. Given
the poor prospects for debt recovery from a default in India, we are on the conservative side.
Fitch Ratings said India lacks an adequate framework to resolve non-performing loans in a
timely manner. Saswata Guha, an analyst at the ratings firm in Mumbai, said the bill should have
been put in place decades ago rather than when the system has hit a crisis.
The current bill is essentially the current governments answer to help resolve this crisis, said
Guha.
Foreign holdings of Indian government and corporate debt dropped by Rs.6,700 crore ($1
billion) in the nine days through 26 May, the longest stretch of withdrawals since July 2013,
National Securities Depository Ltd show.

Getting Indias bankruptcy code up and running is very important, said Sean Chang, head of
debt investment at Baring Asset Management Ltd. in Hong Kong. India is looking at reform and
to do so, these laws need to be in place.
Clearer path
India boasts the fastest growth rate among the worlds major economies, expanding 7.6% in the
year to March 2016. Yet lending grew 9.2% in the 12 months through 29 April, compared with a
five-year average of 14%, central bank data show.
India needs to ensure quality insolvency professionals come into the business, according to
Kalpesh J. Mehta, a partner for Deloitte Haskins & Sells LLPs financial-services practice in
Mumbai. Putting this system in place and making it operational could take as much as a year.
Indias junk-rated companies have long struggled to access both the rupee and US dollar
markets. BlackRock Inc. says that while the new rules give creditors a clearer path for asset
recovery, its benefits wont be seen immediately.
In the long term, it is a positive development for the onshore Indian credit market and does
make the market more attractive for offshore investors, said Neeraj Seth, head of Asian credit at
the asset manager. The full implementation is expected to take time and how its being
implemented is very important too.
Previously, companies were identified as ailing if they fail to repay debts for three consecutive
quarters. Its difficult to dislodge management control and employees often go unpaid, as in the
case of Kingfisher Airlines Ltd. The new law proposes an insolvency resolution plan agreed by
75% of creditors, with the priority being to pay staff salaries in case the decision is to liquidate.
Failure to reach agreement could see a takeover by a government-appointed management team.
Meaningful progress can only be made once this is also accompanied by judicial reforms,
including more judges and more bankruptcy experts, said Guha at Fitch.