Home / Money / Calculators /  RBI lures distressed debt experts for bad loan job

Singapore: India’s bad loans are luring distressed debt experts as policy makers get tough on delinquent borrowers and welcome foreign investment to spur the economy.

SSG Capital Management Ltd., the Hong Kong-based fund manager founded by former traders from Lehman Brothers Holdings Inc., bought a 49% stake in India’s distressed-investment specialist Assets Care & Reconstruction Enterprise Ltd. in September. Apollo Global Management LLC raised $825 billion in May with partner ICICI Bank Ltd., India’s largest private-sector lender by assets. The World Bank’s International Finance Corp. is considering stakes in bad-loan managers.

The Reserve Bank of India (RBI) is pushing new rules to empower lenders to recoup money from defaulters governor Raghuram Rajan called “freeloaders." Fitch Ratings forecasts restructured loans will jump to a record Rs4.7 trillion ($76 billion) by March. Prime Minister Narendra Modi says foreign funds are waiting to pump $100 billion into an economy that will expand the most in four years in 2015, according to a Bloomberg survey.

“Some of the foreign investors are in discussion stages and transactions will start taking shape in the next six months," said Shailendra Dhakadey, managing director of Mumbai- based Special Situation Advisors (India) Pvt. “Regulators are taking interest in this area and coming out with guidelines to ensure the market for distressed debt evolves."

Investment pipeline

IFC, which has financed projects including power generation for India, is evaluating India’s non-performing loan market and a venture with private equity firm Clearwater Capital Partners LLC to fund cash-strapped local companies, it said.

Asset reconstruction companies, set up after parliament passed a law in 2002 to clean up the banking system, “continue to play a limited role in the distressed asset space," Inessa Tolokonnikova, IFC’s financial institutions group manager for South Asia in Mumbai, said in a 8 December e-mail interview. “IFC will be considering taking equity stakes in ARCs to help."

Rajan on 26 November called for changes in India’s legal system, noting that banks only recovered 13% of the amount at stake in 2013-2014 when cases were brought before a debt recovery tribunal. He also recommended new bankruptcy courts and turn-around agents.

Capital deficit

The asset reconstruction companies buy soured debt with a mix of their own money and loans known as security receipts from banks. The RBI tripled the amount of their own money they must use to 15% of the bad loan price from August.

That rule change has made the bad loan managers undercapitalized relative to the size of non-performing assets in India, prompting them to seek funds from overseas, according to restructuring consultancy Alvarez & Marsal Holdings LLC.

“The upshot is an incremental increase in debt funds looking seriously at India," said Ajay Rawal, a London-based managing director at Alvarez & Marsal.

Rajan is toughening his stance against big defaulters because their refusal to repay debt deprived others of capital for growth. While more than 90% of the ARCs have either initiated talks with distressed funds or are open to discussions with them, the lack of credibility among defaulters remains a big hurdle for investors, Alvarez & Marsal said in a report last month.

‘Changing now’

India isn’t suited for every distressed fund, according to Belos Capital (Asia) Ltd., a Hong Kong-based bad-loan buyer managing HK$2 billion ($258 million) of assets.

“We have so much on our plate now in China," said Hanson Wong, chief executive officer at Belos Capital in Hong Kong. “It’s not a priority. We don’t want to go there."

The RBI left interest rates unchanged for a fifth straight meeting on 2 December while signaling a possible easing early next year to spur growth. India’s economy grew 5.3% in the quarter to 30 September, compared with 5.7% in the preceding three months.

The average cost of insuring the debt of State Bank of India against default for five years has fallen 10 basis points this quarter to 152 basis points, according to CMA.

SSG Capital’s purchase of its stake in Assets Care & Reconstruction Enterprise “is one of the indications" of foreign interest in India, R.P. Singh, chief executive of ACRE, said by phone on 2 December.

“India needs to bring fresh capital and expertise to handle the situation and unlock value from the distressed portfolio," said Dhakadey of Special Situation Advisors. “Most investors started by looking at the Chinas, Koreas and Vietnams of the world but somehow they have not been able to crack the code of India investment. It’s changing now." Bloomberg

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