Banks taking majority stake in stressed-debt funds unwarranted, says RBI's Rajan

India’s central bank is opposed to banks taking a majority stake in planned stressed-asset funds, and would rather have external investors provide their expertise in managing soured loans, Governor Raghuram Rajan said on Tuesday. The Indian government is looking for ways to reduce banks’ distressed debt pile of $120 billion, or 11.5 percent of all loans, as record bad loans restrict the lenders’ abilities to provide fresh credit to fuel the economy. [caption id=“attachment_2778450” align=“alignleft” width=“380”]  RBI governor Raghuram Rajan[/caption] The government has yet to reveal details, but bankers have said talks are on for two kinds of stressed-asset funds - one that would buy bad loans from the banks and the other that can invest in companies needing more capital. Rajan has previously voiced concerns about the efficacy of a so-called “bad bank” backed by the government as most of the stressed loans are already with the state-owned banks. He said on Tuesday the RBI had been asked for its view of stressed funds which it had given to the government. “Ultimately, it’s the government as well as other investors who will be coming together along with banks to set up the distressed funds,” he told a news conference after the central bank’s latest policy review, at which it kept interest rates on hold. “In our view, majority ownership by the banks of any such fund is probably not wise or warranted,” said Rajan, adding that he would like to see other distressed asset specialists step in along with the banks and government to help set up such funds. Rajan also said pricing would be a key issue for a stressed fund if it wanted to buy bad loans from the banks, which he said would make them look more like a “bad bank”. India has more than a dozen asset reconstruction companies to buy bad loans from banks but deals have been few due to disagreement over “haircuts” the banks should take in selling the loans. One of the options the government is considering is to set up an external panel to decide on such haircuts, officials have said.