Indian bankers want to put away the pile of toxic loans and make way for fresh and healthy credit. And they want to save whatever capital they are left with while doing so.

Enter the idea of setting up an asset management company (AMC) that would be independently run by professionals. The company would buy big toxic assets from bankers at a market- determined price and then auction it to interested buyers.

Since the mess belongs to public sector lenders, they are willing to foot the initial bill for washing their laundry. Rajnish Kumar, chairman of State Bank of India, the country’s largest lender that accounts for a third of toxic assets, said that banks will put in money initially but more than 50% is expected to come from other institutions.

That’s where the trouble starts.

Scores of stressed asset funds, distressed asset experts and vulture funds have been doing the rounds in India to pick up dud loans to find value. But hardly anyone has made a splash. Onerous rules, adamant bankers and the spectre of fraud have made foreign investors wary of putting in money.

How does the government expect the AMC to attract investment into the bad assets it will hold?

The idea is to set up the AMC in the next six months and make it buy bad loans of above 500 crore in size. These make up a total of 3 trillion. The AMC will father many alternative investment funds (AIF) to manage these toxic assets.

The biggest question is whether the AMC can attract investment. It is clear that investors are not sure about this.

Ravi Chachra, managing partner and co-founder of distressed asset fund Eight Capital, believes governance is of most importance if the AMC wants to attract investments. “It will depend on who will manage the fund and how independent it is," he said.

If indeed it is run by independent professionals as interim finance minister Piyush Goyal has indicated, the transfer prices of loans are unlikely to be rigged.

The idea of inviting bids from investors spanning across ARCs, other AIFs, stressed funds and even companies is wise.

In short, the AMC solution to fix bad assets has its merits but it leaves many questions unanswered. Shares of banks haven’t made big gains since the announcement of the government’s newest plan to fix bad assets. Unless doubts over governance and capital are cleared, investors are unlikely to put their faith in bank stocks.

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