Did you know that Japan is ranked number one in the world in resolving bankruptcies?
As per a World Bank study, Japanese banks recover around 92% of the outstanding amount on defaulting loans. And that too, within just 6 months of the bankruptcy proceedings!
Compared to this, India's rank is 103. It takes around 4.3 years to resolve bankruptcies in India.
The recovery rate, at just around 26%, is one of the lowest in the world.
But that was in the past. Things are about to change for the better.
The government and the Reserve Bank of India (RBI) have finally decoded the banking sector's non-performing asset (NPA) problem.
Yes, it has taken a long time. But things have now started to turn around.
The biggest challenge was to acknowledge the sheer scale of the problem. Once this was done, the next step was to take strong action to solve the problem.
But this wasn't an easy task.
Banks tried their best to recover their money from defaulters but they couldn't. They didn't have the power to do so quickly.
Enter... The Insolvency and Bankruptcy Code (IBC).
| --- Advertisement --- |
The Bombay Investing Society…
For over 16 years, members of the exclusive Bombay Investing Society have had access to solid safe stock recommendations…
Recommendations that generated double, even triple digit returns!
And the best part is…
This exclusive society is currently accepting new members.
Click here to find out how to join this exclusive society…
This is a game changer for India's banking sector. The IBC gave banks the power they needed.
Earlier, banks had to run after promoters to recover their money. Now promoters are running after banks and looking for solutions.
As per the RBI's financial stability report, more than 4,300 applications were filed in the National Company Law Tribunal (NCLT).
With this, banks have sent out a clear message - pay up...or be ready for bankruptcy proceedings.
Ten days back, we had a first taste of success after the banks successfully recovered Rs 352 billion following the successful resolution of Bhushan Steel. This implies a haircut of around 37% for banks.
Mind you, most banks had already made provisions for about 50% for Bhushan Steel's loan. Now with the successful resolution (with the recovery rate of ~73%), the proceeds from the sale will directly boost profitability of the banks.
This is good news for subscribers of Smart Money Secrets. Our recommendation last month, will benefit from this resolution.
This bank has already made 50% provision and with the successful resolution, it will write-back this loan from the provisioning. This means more profits and more funds available for further lending.
This is what the management said yesterday on a con-call:
- "We are seeing some recovery, especially in the steel related cases. As you are aware, one case is already settled. Going forward, as more cases in NCLT get resolved, we expect repayments to start coming in. This will reduce gross NPA numbers".
The stock was up 1.5% on the day of the concall. Currently, this stock is still trading below our recommended price as the market awaited more clarity on the NPA issue.
However, with the recent concall, things are looking clearer now. From the current price, we believe, the stock has an upside of about 59%.
Clearly, the IBC is the biggest reform for the banking sector in a long time.
It's important to keep in mind, the code remains a work in progress. It has some teething troubles and requires constant tweaks, as indeed all new laws do.
We may not achieve Japanese levels of loan recovery. But, we have no doubt, India has made a good beginning of this front.
More importantly, lending in the next credit cycle will be more disciplined as a result.
Chart of the Day
Last year, India jumped up 30 places and into the top 100 on the World Bank's 'ease of doing business' index.
However, when it comes to resolving insolvency, India's rank is still low at 103, much below our neighbouring countries.
On both factors (i.e. recovery rate and the time to resolve a bankruptcy), India is slower than even its poorer neighbours.
India Lags in Resolving Insolvencies
However, going forward, the IBC framework will change India's position as it is a time-bound process.
Cases once admitted are to be resolved within 270 days; if not, companies go into liquidation.
We already had a taste of success with the successful conclusion of the Bhushan steel case.
Enthused by this success, the finance ministry expects banks to write back more than Rs 1 trillion after the resolution of all 12 big NPA cases that have been referred for insolvency proceedings by the RBI.
We believe, this can be a big boon for the banking sector and the Indian economy. This will not only help banks recover bad loans to an extent but also help bring back credit growth.
We recently recommended a company to our Smart Money Secrets subscribers which we expect to benefit immensely from the Bhushan Steel's recovery.
If you do not have access to Smart Money Secrets, you can sign up here...
Research Analyst, Smart Money Secrets
PS: Ankit Shah is one of Equitymaster's best research analysts. The breadth of his knowledge, as well as the clarity of thought he brings to his work, is remarkable. Every day the markets are open, Ankit cherry picks one idea from our 8 premium services. This is the one that he believes is the best money-making opportunity of the day. He then shares this idea with an exclusive group of readers on his 'Insider' list.
Until Thursday only, you have a chance to join this exclusive group for just Rs 950. Insider is accepting new members! Join here...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringementDisclosure & Disclaimer:
Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use
, available here. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407