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The COVID-19 pandemic has changed, at least temporarily, all facets of society and has had a truly global impact.  The scale of fatalities and the losses suffered by families are truly tragic.  Whilst the impact of the virus from a medical perspective is starting to become clearer, the economic impact of the pandemic is still largely unknown.  From Europe to Asia and the United States, businesses have been tested to their very limits by having to deal with often very stringent lockdown measures in an attempt to control the spread of the virus.  This blog examines how the COVID-19 pandemic affects the Indian economy, especially non-performing assets (NPAs).

The coronavirus pandemic is expected to have a severe impact on credit delivery and asset quality in India, with over US$30.5 billion of loans expected to turn bad over the next 12 months. However, due to the slowing economy, the Indian banking sector was showing signs of distress even before the pandemic. An NPA ‘clean up’ has been mooted for many years.  NPAs grew to 11 per cent of the Indian banking portfolio in 2018, furnishing India with the worst NPA ratio of any major nation. Now, total NPAs in the Indian financial system are expected to rise a further 7 per cent if India ends its lockdown by mid-May, according to a study by McKinsey & Co.

As the US$1.6 trillion Indian banking sector prepares for further erosion in loan growth and quality caused by the coronavirus, the distressed investments market in India is growing. According to Credit Suisse AG, Indian banks have written off loans worth over US$102 million since 2014, allowing lenders to sell such loans more cheaply and meet bidders’ pricing expectations. The State Bank of India (SBI), Bank of Baroda, IDBI Bank, HDFC Bank, Union Bank of India, Allahabad Bank and L&T Finance are among the lenders that have put up bad assets for sale amid the crisis. About US$1.5 billion of distressed assets were put up for sale this March, usually the busiest month for NPA sales in India. However, bids amounted to less than US$660 million, pushing prices further down.

The opportunities emerging from India’s efforts to clean up its bad loans have caught the attention of global investors, special situation funds and distressed asset managers. Among the first to act on the growing opportunities is Carlyle Group, which has partnered with SBICAP Ventures Ltd, an SBI subsidiary, to set up and float an India-focused distressed asset fund that could raise up to US$1.5 billion, to be invested exclusively in distressed assets in India. Other global funds that have been recently active in this space include Kotak Special Situations Fund, TVS Group, SSG Capital, AION Capital and India Resurgence Fund.

The coronavirus pandemic has given rise to growing investment opportunities in Indian distressed debt markets. Prominent investors such as Carlyle Group and Kotak are already taking steps to capitalise on these opportunities. Having recognised the importance of foreign debt inflows to Indian infrastructure, the Indian government is expected to implement further reforms liberalising the External Commercial Borrowing regime and encouraging foreign debt inflows. Therefore, foreign activity in this sector is likely to grow as a result of the pandemic.  Investors looking to participate in the growing opportunities offered by Indian debt markets have to identify the entry route that best meets their needs, and overcome the applicable regulatory hurdles with care.

Reed Smith’s expertise in the NPA sector, coupled with our strong track record of helping clients navigate the Indian market, makes us one of the best placed firms for advising on the unique challenges of these transactions.

For further information on the Reed Smith’s India Business Team, please visit our team page.