India’s $120 billion debt attracts global funds

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 Rs 4 trillion ($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 per cent 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.

The 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 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.