India Needs a New Round of Bankruptcy Reform That Won’t Stiff Creditors – Bloomberg

Five years ago, India came up with a legal answer to itsperennial economic challengeofrescuing the money stuck in zombie firms. Unlike China, which hasthe cushion of high savings, Indias inefficient use oflimited domestic capital has meant a chronic inability to put its swellingranks of youthto work. After toying with the ideafor more than a decade, the solution New Delhi hit upon was a modern bankruptcy code.

The numbers have beena mixed bag.According to an analysis by REDDIntelligence, of the 4,300-plus stressed debtors that have been taken through the 2016 corporate insolvency law, 48% were liquidated, half of them under 314 days. Of the 13% that got sold to bidders, half exitedbankruptcy in less than 425 days. These, as the REDD researchers note, arent bad outcomes, considering that wait times previously werefive-years-plus.

However, if the insolvency law did indeedlead to timely extractionof meaningfulsums, one shouldalso see redeployment of credit in new ventures. The evidence on this front is weak. At 6%, loangrowth is anemic.Companies dont want to borrow even at negative real interest rates; corporate leverage is at an all-time low of 0.46 times equity, according to the Boston Consulting Group.

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Incomplete bankruptcy reform isntthe only reasonIndian banks arent lending more to new firms,choosing instead to finance unsecured personal credit, which doesnt create many more new jobs. Over the past year, itcouldbe seen as a confidence issue. As a deadly second bout of the pandemic recedes, firms probably need assurancethat the economy wont be hit by lockdowns again. That would require a far greater proportion of the population to be fully vaccinated than the less than5% at present.

Yetthe bankruptcy code doesnt deservethe full benefit of the doubt. Its biggest failing is its institutional infirmity. Leaving aside a fewbig-ticket sales, mostly of steelmakers such asEssar Steel India Ltd.,the recovery rate for creditors has been just24%, according to Macquarie. While India is perhapsable to extricate capital fasterthan before, it still cant get much out of dead firms.

Even the insolvency tribunal issurprised that metals magnate Anil Agarwal is paying almostnothing to wrest control of Videocon Industries Ltd., after creditorsaccepted just 4cents on the dollar for their 648 billion rupee ($8.7 billion) exposure to theconsumer-appliance maker and its 12 group companies. Bankers to Siva Industries and HoldingsLtd. approved a one-time settlement with thecontrolling shareholder of the investing firm, taking a 93.5%hit on theiroutstanding claims of $650 million.In the case ofRuchi Soya Industries Ltd., lendersfirst agreed to a harsh haircut. Then they gavemoneyto Yoga guruBaba Ramdevs Patanjali AyurvedLtd.to take over the bankrupt edible-oil maker.

The low recovery rate isntdoing any favors to Indias state-run banks, which hold most of the souredloans. Severalof them will now own astake in Jet Airways India Ltd., which last flew more than twoyears ago. The airlines landing slots at airports havebeen given to other carriers, andthe pandemic has ravaged the economics of aviation.All thisdrama to recoup5% of loanswhen creditors had only to oustNaresh Goyal,the founder of what was once Indias dominantairline, in time. They didnt.Even now, Vodafone Group Plcs India joint venture is struggling to stay afloatbecause of extractive government demands, but bankers arent doing much to protect their exposureto the debt-laden telecom operator.

Political constraints have never allowed Indias publicinstitutionsto save capitalism from powerful capitalists, something that a tough bankruptcy law was supposed to change. It hasnt.Soemployees and vendors suffer, asdotaxpayers who fillstate-run banks capital hole. For nine years, Punjab National Bank, the second-largest of them by assets, has only fleetinglytraded above its book value, a reflection of what investors makeof theasset quality of public-sectorlenders.

In hindsight, giving poorly governed state-runbanks the power over assets was a bad idea. A U.S.-styledebtor-in-possession bankruptcymay have been far more suitable to Indias on-the-ground reality. Abusingproductive capital to benefita small, politically connectedcapitalist class has exacerbatedunfairness, and loadedthe dice against workersin a labor-surplus country.

AsObservatoryGroup analyst Ananth Narayan notes, Indias employment-to-population ratio, which was a steady 55% in 2005, has fallen to 43%. Bangladesh and Vietnam have fared better. Not all of the blame for inhibited employment can be laid on the doorstop of a flawed bankruptcy law. By ignoring low-skill textile and shoe manufacturing and overemphasizing high-skillsoftware, India has scored an own goal.

Still, thelarge-scale gaming of insolvencyresolution hascost India. Even before the pandemic, the financial system was creaking, Now, its just being kept in a holding pattern. Banks have the assurance ofgovernment guarantees onloans to pandemic-hit small businesses. The interest they need to pay savers is also being kept artificially depressed by the central bank in the face of persistently stubborn inflation. Even then, 9.8% of their loan book could sour by March 2022, the central bank has warned. The plan now is to shift at least $11 billion in dud corporate loansfrom commercial lenders to a newly created bad bank.

A junkyard for firms that have very little salvageable capitalwont do much for newinvestments. Rehabilitating assets that still have some value will require an urgent fix to the law. A bankruptcy salon offering90% haircuts is a sad joke on on Indias taxpayers, savers and workers.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:Andy Mukherjee at amukherjee@bloomberg.net

To contact the editor responsible for this story:Patrick McDowell at pmcdowell10@bloomberg.net

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India Needs a New Round of Bankruptcy Reform That Won't Stiff Creditors - Bloomberg