Photo: Mint
Photo: Mint

RBI, govt to set up joint stressed asset fund

The fund, once set up, will help take bad assets of the books of the banks directly

Mumbai: The Reserve Bank of India (RBI) has given its approval to the idea of setting up a joint stressed asset fund led by banks to invest in debt ridden companies that do not have the ability to service their debt.

On Saturday, The Economic Times reported that the RBI had written a letter to the Indian Banks' Association (IBA), approving the proposal to set up dual funds to invest in the equity of stressed funds and to provide working capital where needed.

According to a senior official at the IBA, a clutch of large banks had approached the banking regulator to get an approval on setting up such funds. The RBI has written back suggesting it does not oppose such a fund.

"Now each bank has to get board approvals on how much they can commit to the equity investment fund. They won't be a part of the fund that gives working capital. Moreover, the government has to officially commit a certain amount from the NIIF (national infrastructure investment fund)," the official said on conditions of anonymity as the communication is confidential.

Earlier this week, minister of state for finance, Jayant Sinha had stated that the government was working on a stressed asset fund with banks and would invite domestic and international investors to join in.

The fund, once set up, will help take bad assets of the books of the banks directly. However if banks hold majority equity in this fund, they will continue to have exposure to these stressed assets indirectly.

Also how quickly these assets can be revived remains unclear. Reviving a company isn’t just about pumping money into a stressed firm. A number of these companies also require new managements and better operations. Stressed asset professionals and insolvency professionals are needed to help turn around firms that can be revived and recover money from those that can’t.

Infrastructure and metals are the two largest contributors to the stress in the banking system. Turning around these projects is expected to take time. To be sure, a fund which can help infuse equity into these projects will help make them more viable.

A bank sponsored fund will join a wide variety of stressed asset funds from around the world that have shown interest in the Indian markets. Many of these funds have held discussions with banks to directly invest in stressed assets and take them off bank books. But deals have been slow to close since the seller and the buyer have found it difficult to agree to a valuation.