‘Bad bank’ to clean up India’s $27bn debt mountain

With over 150,000 operational branches which are home to approximately US$2tn worth of deposits, and more than a billion customers, India’s lenders appear to be very healthy, if the figures are all you have. But in truth, the sector is in shambles.

A host of the country’s lenders are grappling with tens of billions of dollars in bad debt following years of indiscretion is saddled with tens of billions of dollars of bad loans after years of careless lending to dud projects. 

Reports have revealed that government-owned banks account for well over 60% of the bad debt, and five lenders have had to be rescued from collapse since 2018.

Now the government is putting plans in place to launch a “bad bank” which it has been considering for a while now. The bank will be charged with curbing US$27bn of bad loans as well as cleaning up the balance sheets of commercial banks.

Since the total value of bad loans on record at various commercial banks is now set at approximately US$100 billion, this clean-up would only take are of about a quarter of India’s bad debt. 

A “bad bank” – also called an asset reconstruction company – typically purchases bad loans from burdenedbanks at a set rate. Then it liquidates or sells assets that borrowers have presented as collateral against the loans.