October 4, 2015
Abstract: Credit growth in India has been sluggish primarily because of bad assets on the balance sheets of banks. Strategies for resolving the issue in the form of asset reconstruction companies (ARCs) have had limited success. The core issue is valuation: what is a “bad asset” actually worth? In the absence of a standardized mechanism for valuing such assets, the sale of impaired assets below their notional value could be career-limiting for management. A critical precondition for disposal of bad assets is a rule-based market mechanism for valuing them and the government’s use of financial levers to facilitate and support the process. The management of banks can also be incentivized to participate in the process. For example, the closer the sale price is to the upper end of valuation range (or even in excess), the better the deal-making capabilities of the management presumably are and the greater should be the reward.
Keywords: banking sector; valuations; financial markets