Five years ago, India came up with a legal answer to its perennial economic challenge of rescuing the money stuck in zombie firms. Unlike China, which has the cushion of high savings, India’s inefficient use of limited domestic capital has meant a chronic inability to put its swelling ranks of youth to work. According to an analysis by REDD Intelligence, 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 exited bankruptcy in less than 425 days. These, as the REDD researchers note, aren’t bad outcomes, considering that wait times previously were five-years-plus.
According to Boston Consulting groups – Companies don’t want to borrow even at negative real interest rates; corporate leverage is at an all-time low of 0.46 times equity. The evidence on this front is weak. At 6%, loan growth is anemic.
Incomplete bankruptcy reform isn’t the only reason Indian banks aren’t lending more to new firms, choosing instead to finance unsecured personal credit, which doesn’t create many more new jobs. As a deadly second bout of the pandemic recedes, firms probably need assurance that the economy won’t be hit by lockdowns again. That would require a far greater proportion of the population to be fully vaccinated than the less than 5% at present.
Even the insolvency tribunal is surprised that metals magnate Anil Agarwal is “paying almost nothing” to wrest control of Videocon Industries Ltd., after creditors accepted just 4 cents on the dollar for their 648 billion rupee ($8.7 billion) exposure to the consumer-appliance maker and its 12 group companies.
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 loans from commercial lenders to a newly created bad bank.
A junkyard for firms that have very little salvageable capital won’t do much for new investments. Rehabilitating assets that still have some value will require an urgent fix to the law. A bankruptcy salon offering 90% haircuts is a sad joke on on India’s taxpayers, savers and workers.