Will bad bank succeed? Experts on why asset recovery chances look bleak

Anish Mashruwala, Partner, J Sagar Associates:

 This is a positive move for the banking sector and the Government has ensured that the majority of the PSUs are capable of standing on their own feet before announcing this. The success of the bad bank however will depend on the implementation and management of the transferred NPAs and it is likely that the Government will keep a close eye on the management of the India Debt Resolution Company that will be tasked with the same.

Manishi Raychaudhuri, BNP Paribas: We are also positive about this bad bank creation. We think that that would free up capital as far as the Indian banking sector goes, and they would obviously be a degree of differentiation as to the quantum of benefit that goes towards different banks. But on the whole, we are quite positive about this development.

Nomura: The average recovery run rate of insolvency proceedings barring certain large assets has been in early double digits. Most of the Rs 900bn in the first phase will accrue from lists #1 and #2 that the RBI had asked the banks to move to the insolvency process a few years back. The chances of material recovery from these assets look bleak.

Kotak Institutional Equities: The major benefit would accrue through faster debt consolidation, potentially leading to quicker decision making and better recovery rates. We don’t see a meaningful impact in our coverage universe. Further, senior management bandwidth would be released on solving these problems, which can be channelized towards identifying fresh segments for growth that has been tepid in recent years.

Global brokerage Jefferies: Aggregation of debt at one entity is expected to speed up the process for finding interested buyers, transfer of assets, formalising write-downs and reworking terms of new debt. Nevertheless, the quality of assets matters the most. Historically, banks see a 10 percent recovery from written-off loans, and we believe that recoveries here may be broadly in line. While there is a chance that accounting policies allow for upfront recognition of gains, we hope RBI/ banks take a conservative stance.