MUMBAI Global distressed asset buyers such as J.C. Flowers & Co and Apollo Global are flocking to India, where banks have been ordered to clean up an estimated $120 billion of bad and troubled loans.
Bad loans at Indian banks jumped by nearly a third to around 4 trillion rupees ($60.3 billion) late last year as the central bank drives a national clean-up of banks' balance sheets. That figure doubles to a record amount when restructured, or rolled over, loans are included - amounting to 11.3 percent of all loans, the government says.
Foreign firms have been similarly attracted to China, which has also seen an explosion in bank bad loans, though, unlike India, China is not pushing banks to carry out a thorough asset quality review that would increase the number of bad loans.
Reserve Bank of India Governor Raghuram Rajan wants lenders to fully disclose and provide for all problem loans by next March, an exercise that could force banks to consider selling off chunks of bad loans to specialists to free up capital.
As more bad loans are likely to be revealed as part of that broad asset quality review, distressed-debt buyers sense an opportunity.
J.C. Flowers, which has invested over $14 billion across several countries and recently announced a joint venture with financial services group Ambit Holdings, plans to set up a so-called Asset Reconstruction Company (ARC) as well as a distress-debt fund in India, Asia's third-largest economy.
It will focus on small-and-mid-cap companies, aiming to build $1 billion in assets under management in India, said Rahul Gupta, joint group CEO at Ambit.
Apollo Global Management, which has set up an $825 million fund in India in a partnership with top private sector lender ICICI Bank's (ICBK.NS) private equity arm, is "refining the details" of its investment plans in Indian distressed assets.
"We believe (the government and the central bank) are doing a good job of bringing greater attention and transparency to the issue," said Mintoo Bhandari, a senior partner at Apollo, adding the focus on resolution of bad loans and the easing of some rules was "increasing interest" for global investors like Apollo.
For now, Indian banks can only sell their bad loans to ARCs, entities that were set up as early as a decade ago to help purge the banking sector of bad loans. However, a lack of capital and opaque rules meant they have so far played just a minor role.
To bring in more foreign capital, the government's budget in February announced a range of measures including allowing both sponsors and foreign investors to fully own ARCs without having to seek prior regulatory approval.
"These are positive changes inviting foreign capital," said S. Sriniwasan, CEO of a $525 million fund announced recently by Canada Pension Plan in a partnership with India's Kotak Group. He said he expected more foreign investors to buy Indian distressed assets.
Siby Antony, managing director of Edelweiss ARC, the country's biggest bad loan buyer, said his firm aimed to buy 160 billion rupees worth of bad loans this fiscal year and would need as much as 20 billion rupees in new capital.
"I think many are looking at India," he said of foreign investors new to this market.
ONLY FOR THE PATIENT
Recovery of bad debts in India remains low due to a very slow legal process and the multiplicity of tribunals. Also, there is no secondary market for trading bad debt, making it tougher to exit.
The government is drawing up new bankruptcy laws that aim to make the process faster and smoother, but full implementation of those laws and the creation of the necessary infrastructure is still 2-3 years away, experts say.
"I'm optimistic regarding the introduction of the new bankruptcy code," said Bhandari at Apollo, adding a warning that "only investors with a genuine appetite for tackling complexity and with a fair degree of patience will be effective in this arena."
Other foreign investors with tie-ups to India's distressed asset sector include KKR & Co (KKR.N), which recently won approval to buy a stake in International Asset Reconstruction Co. KKR has also announced a distressed debt joint venture in China.
Billionaire Ajay Piramal's Piramal Group has also said it intends to set up a $1 billion fund to invest in distressed assets.
The rise in troubled assets also means more business for turnaround specialists such as Alvarez & Marsal, which has stepped up hiring for its Indian operations, and is looking to add new capabilities such as insolvency practitioners, said Nikhil Shah, a managing director.
(Reporting by Devidutta Tripathy, with additional reporting by Sumeet Chatterjee; Editing by Lisa Jucca and Ian Geoghegan)
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Published Date: Apr 05, 2016 05:15 am | Updated Date: Apr 05, 2016 05:15 am