Work with management of overindebted firms on a restructuring plan beforegranting debt relief. Trigger the bankruptcy-liquidation process on nonviable firms. Fund new investments needed as part of physical restructuring. Provide corporate governance through representation on boards of directors. The initial information is that banks are performing these roles only to a limited degree.
Signals are mixed on how vigorously governments want banks to pursue bankruptcy proceedings.
With little opportunity to recover funds, banks are accepting even dubious restructuring programs from enterprises. But banks, except under government directive, are avoiding making new loans to loss-making enterprises. Together with a cut in fiscal subsidies, this is imposing a harder budget constraint on the enterprises. Nonviable enterprises seem more likely to starve to death than to die through execution. Corporate restructuring is not a normal part of commercial banking.