Home >Industry >Banking >Govt planning fund to invest in distressed assets of banks: Jayant Sinha

Mumbai: The centre is exploring the possibility of setting up a stressed asset fund to invest in distressed assets of banks, said Jayant Sinha, minister of state for finance.

“We will have a significant stressed asset fund," Sinha said on the sidelines of an event organized by rating agency CRISIL Ltd on Tuesday.

On Tuesday, CNBC-TV18 reported that the government is considering a stressed asset fund, which would be led by State Bank of India and may be set up in partnership with a global fund.

Sinha declined to share the specifics and said that the details, including whether the fund would be spearheaded by the country’s largest lender, SBI, are still being worked out.

Sinha did not disclose the likely size of the fund either.

The government is optimistic that it would have ready investors for the stressed assets, Sinha said.

The comments come at a time when the country’s banking sector, dominated by public sector banks, is saddled with bad loans.

Following an asset quality review (AQR) by the Reserve Bank of India (RBI) in December, Indian banks saw a massive surge in their reported bad loans over the third and fourth quarters of fiscal 2016. Such was the rise that the gross non-performing assets (GNPA) across 39 of the 40 listed banks touched an unprecedented 5.8 trillion as of March 2016.

This increase in stressed assets on the books of banks has eroded their capital and restricted their ability to lend for fresh projects.

The government, meanwhile, does not have adequate resources to recapitalize banks. It plans to infuse 70,000 crore into public sector banks over three financial years starting fiscal 2016. Rating agency Fitch Ratings, which had pegged the capital requirement for Indian banks at $140 billion by fiscal 2019, on Tuesday said the actual requirement may be even higher due to the jump in bad loans.

When asked whether the surge in distressed loans of public sector banks was more than what the government anticipated, Sinha said that the government has been working with RBI to gauge the extent of bad loans with the lenders.

Setting up a stressed asset fund, which can take stressed assets off the books of banks, will help release capital, said an expert. “If the fund is able to unify the assets under one platform, then this could work to addressing the problem of stressed loans with banks," said Abizer Diwanji, leader of the financial services practice at consulting firm EY.

“But, clearly, the government will have to build the expertise to handle this, which they currently don’t have," he added.

Satish Gupta, managing partner at Vertex Capital partners, a distressed asset advisory firm, agreed with that view.

“While the form and nature of the stressed asset fund is yet to be announced, the involvement of the government as a direct stakeholder in large stressed assets will not only ensure quick distressed asset resolution but also enable recapitalization of the project efficiently," said Gupta, while adding that the pricing has to be right.

Whether a government-sponsored fund would be any more effective than private stressed asset funds remains debatable. A number of domestic firms and foreign funds have moved into the stressed asset segment over the past 12 months. On 9 May, Mint reported that nearly a dozen firms have applied to RBI to start asset reconstruction firms. In addition, large groups like the Piramal Group are planning to set up stressed asset funds.

Sinha suggested there is space for everyone.

“Of course, we expect a variety of funds—stressed debt funds, special situation funds and NIIF (national investment and infrastructure fund) to participate in equity investment of these stressed assets," Sinha said.

“There are also many players looking into these stressed assets. So, we expect there will be a vibrant market to be able to take these assets that are in need of equity investment and to bring them back to high-quality operational level," he added.

A government-sponsored stressed asset fund may be akin to a “bad bank" like structure, although in this case, the assets would be bought and not transferred directly.

In the past, RBI governor Raghuram Rajan has opposed the idea of a bad bank-like structure sponsored by the government. Rajan has maintained the resolution of stressed assets must happen through the private sector.

“I would love to have a private sector-led bad bank, where some private equity or some asset reconstruction companies come together and try and form the good bank-bad bank structure. My worry is that if you do it through the public sector, almost immediately it will get entangled in allegations of corruption, of non-transparency, there will be litigations filed asking why did you buy a particular loan out," Rajan had said in an interview to Mint in June 2015.

“Just imagine the mess this would soon come to, especially given that some of the distressed assets belong in a big way to certain groups. It is not something you want the government to go into in a big way," Rajan said.

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