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.
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.
