Bankruptcy Code of limited use for current asset woes: Moody's

Pointing to the limited legal infrastructure at hand, rating agency Moody's on Thursday said banks in India may get limited help from the new Bankruptcy Code to solve current asset quality woes.

In particular, banks would still have limited avenues available to dispose of distressed assets. The lenders would, in general, remain reluctant to make appropriate haircuts to reflect their current weak operating conditions.

Moody's said in press statement the bankruptcy law was credit positive for Indian banks, but challenges remained.

India's new Bankruptcy Code would significantly boost the bargaining power of creditors against large debtors for the resolution of distressed assets. "The current weak legal framework for asset resolution has been a key structural credit weakness for Indian banks," said Srikanth Vadlamani, a Moody's vice-president and senior credit officer.

The proposed new rules address several key inefficiencies in the current resolution regime, the rating agency said.

Moody's also pointed out significant infrastructure constraints needed to be overcome before the framework could become fully operational. Legal resources and information utilities have to be built to support the new restructuring procedure.

Another constraint that had to be dealt with was the time required for various stakeholders to accumulate the requisite legal experience and precedents for the new system to be fully up and running.

Thought also had to be given to the limited impact that the new law may have on the liquidation process, Moody's said.