Effects of regulatory intervention in banking
The restructuring mechanism cannot be a permanent solution to non-performing assets
Dealing with private-debt distress became a major policy challenge for regulators in many emerging-market economies in the last decade in the absence of a strong legal framework. In India, bankruptcy reforms were enacted for the first time in 2016 in the form of a unified Insolvency and Bankruptcy Code. In this context, World Bank estimates suggest that if banks lend $1 in India, they can only recover 26 cents in times of distress, and it takes, on an average, 4.3 years—twice as long as in China to recover the loan. The longer the bankruptcy process takes to recover the loan the lower will be the recovery amount, when assets are divertible. Kingfisher Airlines is the most high-profile case of such bad loans where the company assets are valued significantly less today than what they would have been if the assets had been sold in 2012 to recover the loans.