India’s Bad Debt Is Looking Better to Investors | Hacker News Reader

India’s Bad Debt Is Looking Better to Investors

nytimes.com

Sure it's looking good to investors, but we, the Indian taxpayers (and domestic investors) are financing the losses incurred in the distress sales. While I understand that the Indian government and the Reserve Bank of India need to get India's banks to write down non-performing assets on their books, the interests of the Indian taxpayer and domestic investors need to be taken into accout. The Indian government needs to ensure that there is no disorderly unwinding of the debt markets that hurts citizens.

Domestic investors should benefit the same as foreign investors. Even the banks would benefit from the new law. It's in their interest to get these non-performing loans off their balance sheet and this change creates legal certainty for buyers to come in. If the banks are already adequately capitalized then they should benefit by quickly being able to take control of the companies and/or its assets.

I'm referring the the domestic investors (including India's banks) who make the original investments. They are taking a massive haircut. And India's banks are mostly public sector banks with majority (usually super-majority) ownership by the govt. They are being re-capitalized with debt and inflationary borrowings from the central bank. As an Indian taxpayer and a domestic investor, I'm getting hit both ways. Hopefully, this will translate into faster GDP growth in future, but I'm not so sure.

> I'm referring the the domestic investors (including India's banks) who make the original investments.

The govt introduced this law so that the NPA's can be recovered at least partially by the banks, so that the tax payer is hit less. Previously, because of the legal loopholes the companies/NPA's used to drag the liquidation process and paying off in the courts. This law brings a very powerful rule to complete everything in 6 mons.

The banks will recover some of these, reinject money into the credit system so that more deserving can get loans.

The changes in the law are definitely welcome in that regard. My concern is that Indian banks will squander the advantage by indulging in unnecessary distress sales.

Most of these NPAs are due to corruption. We are not solving the root cause they will be back.

Well then we should sell off PSU banks.

Private banks are doing fine.

The original investors (lenders) have already taken a massive haircut, even if they aren't accurately showing that reality on their balance sheets.

Yup, I'm practically bald at this point (metaphorically speaking) :-) My recoveries from non-performing corporate debt in India, so far is less than 10% of the total value (capital+interest). But I'm a small creditor. Folks like me don't have much of a say in what happens in company law board proceedings (This is part of the bankruptcy process in India). What I'd like to see, is for the large lenders, like the State Bank of India, take control of the NPA, remove previous owners and management, appoint better managers and recover the value of the assets. Many NPAs (defaulting companies) are really sitting on valuable real assets like mining concessions, telecom spectrum and urban land holdings. These assets should NOT be sold for a song. That way overall recoveries can improve from a dismal sub-10% number to something like 25-40%. This will help taxpayers (less printing money to recapitalize banks), domestic banks and creditors (higher recoveries), and employees (fewer job losses). This has been done in the past very well (e.g. Satyam) and can be done again if the government shows the political will to do so.

One of the reasons public sector banks might be indulging in distress sales, is probably corruption: Politically connected owners/managers of NPAs (most of them are -- they would never have gotten a loan from a bank in India otherwise) collude with politicians to sell the asset at a ridiculously low price. These owners then team up with international private-equity to then scoop up the assets at a fraction of the price and regain full control with all the losses being borne by the Indian govt. (and through it the Indian taxpayer) and other domestic creditors. Nice deal, if you can get it. And if I were a Private Equity investor abroad, I'd get excited by the deal too.

> One of the reasons public sector banks might be indulging in distress sales, is probably corruption

It is.

Example : http://www.thehindubusinessline.com/money-and-banking/syndic...

Considering the ineffectiveness of law enforcement agencies in India, it is safe to assume that this is the tip of the iceberg.

> The Indian government needs to ensure that there is no disorderly unwinding of the debt markets that hurts citizens.

You saying that suggests you think they actually give a flying fuck about the citizens or their interests. In reality they don't, of course.

I don't know why you got the downvotes. Caste politics has been rampant in India. Fiscal management is an afterthought, if at all that. Most of the elected officials and bureaucrats are there to line their pockets. Not unlike some other countries, like Russia.

I have friends who had to pay bribes for every little thing, company registration, getting the VAT certificate, Police verification etc.

> Most of the elected officials and bureaucrats are there to line their pockets.

That's the same everywhere of course. In some countries it's just more blatant and short-sighted than in others.

> I have friends who had to pay bribes for every little thing, company registration, getting the VAT certificate, Police verification etc.

Yyep! And all those pointless bullshit requirements are in place so that plenty of pissy little parasites get to collect their bribes.

True, but they do want to win elections, don't they?

I have politicians in my family in India and this is actually an end-game for the politicians. This was damn too common with "urban banks" which are like credit unions. Last Indian president Mrs. Pratibha Patil was charged with such frauds during her political career.

This is how it worked with "urban banks". A politician sets up a bank and gets it running smoothly. Such banks can operate only on small deposits and limited to local area only. They are subject to different banking rules and can give much higher returns and aggressive loans. The banks typically do well.

As the elections nearby the politician and his friends will borrow huge loans. New projects will be setup with these loans. After an year or so the project declares bankruptcy and the loan becomes and NPA. Politician's friend buys the stalled project at throw away costs and then if needed sells back to the politician. Wealth is thus transferred from poor folks to rich politicians.

This time however it has happened with major banks.

The MD of India's top private bank makes around $5M-$10M a year. The Public sector bank MD however makes around $50K max a year. that is 10x less salary. The banks themselves are a giant jobs program.

Package it up, rate it AAA, what could possibly go wrong? /s

Don't forget the part where you insure and bet against it!

This is Russian Oligarchs all over again

Changing the law is one thing, tackling the corruption in the legal system another. I'm really not sure if this makes it all that more attractive to me as an investor; in a place like India, you never which corrupt person or entity is going to screw you!

>I'm really not sure if this makes it all that more attractive to me as an investor

The article talks about foreign investments being attractive now specially in distressed assets and bad debts.Prior to this investment in this particular sector was relatively very slow and underperforming.The regulation of the default being handled in 180 days is a brilliant move.

>in a place like India, you never which corrupt person or entity is going to screw you!

Investments in a country depend on a lot of factors, corruption being one of them.India from a pure market point of view is still one of the top lucrative investment opportunity for all investors. I think having a holistic point of view that Indians and Indian entities are out there to screw every investor is totally a childish point of view! India does have problems and are working hard to solve them.

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