Deutsche Bank is setting up a bad-loan buying unit in India

Deutsche Bank AG. is setting up a unit in India to buy and reorganize soured debt as it seeks to profit from an unprecedented bad-loan clean up in the nation with one of the world’s worst non-performing loan ratios, people familiar with the matter said.

The German bank felt the need to have its own asset reconstruction company to buy and reorganize non-performing credit as current Indian rules restrict overseas investors from buying soured loans directly from lenders in the country, the people said, asking not be identified as the information isn’t public. Bank of America Corp. is also considering setting up a similar unit, other people familiar with the matter said.

More than 29 ARCs have been set up in India after parliament passed a law in 2002 to help banks clear their balance sheets by selling bad loans. In 2016 Prime Minister Narendra Modi’s government tweaked rules to allow overseas investors to fully own asset reconstruction companies, adding another way to buy bad debt besides through tie-ups with local units.

Speculation that authorities might eventually allow foreign investors to bid for soured debt without such tie-ups held back some of them from setting up their own ARCs. But that has yet to happen, and a few have moved toward to create their own asset reconstruction units. While Lone Star Funds has already set up its ARC in India, KKR & Co. has applied for an ARC permit.

A spokesman for Deutsche Bank declined to comment while a representative for BofA didn’t immediately respond to an email seeking comment.

BofA is yet to make a final decision on setting up an ARC and may choose not to go ahead with the plan, the people said. Overseas investors including Blackstone Group LP and SSG Capital Management Ltd. have bought into existing ARCs, while others like Bank of America and SC Lowy have structured deals through such firms by paying them a fee.