Like many other emerging markets and quite a few that have already emerged India has recently realized the importance of an effective foreclosure and bankruptcy regime for the efficient functioning of its capital markets. According to a recent report from the central bank, the Reserve Bank of India, the country urgently needs to amend its laws to toughen up on borrowers who default on their loans, not least to encourage mortgage lenders to launch MBS deals and corporates to securitize their receivables.

The report also calls on the government to consider establishing one or more bad loan agencies that would take non-performing assets out of the banking system, by buying them off the banks and parceling them into securitizations. "It's an important idea. There are too many bad loans in the system and that is a drag on liquidity and harms the banks' competitiveness. This could be the fastest way to sort it out," said a Reserve Bank official in New Delhi.

Market watchers commented that if India was to adopt such a system it would be following in the footsteps of the U.S., which established the Resolution Trust Corp. to mop up the savings and loan crisis, and, more recently, efforts in Thailand, China, Indonesia and several other developing nations to set up bad loan bodies. MD

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