Bad bank likely to spark global interest in India's $300 bn distressed assets industry

nirmala sitharaman, bad bank, north block, finance ministry, ssg capital, deutsche bank, sc lowy

Top global investors such as SSG Capital, Deutsche Bank, SC Lowy, Varde Partners and Fiera Capital are likely to raise their stakes in India’s $300-billion distressed assets industry amid prospects of quicker resolutions, after North Block on Thursday announced the formation of a bad bank dedicated to extricating stuck loans.

ET spoke with half a dozen senior executives involved in selling distressed assets about the prospects of the industry.

“The bad bank is definitely an interesting development for India’s distressed assets industry,” said Ankit Thaker, business head, SC Lowy India. “The move should attract more interest from global investors to India’s non-performing loan market. Decision-making is expected to be speedy.”

SSG Capital and Fiera Capital did not comment. Varde Partners spokesperson was not available for comments.

Finance minister Nirmala Sitharaman announced the formation of India’s first bad bank that will have two legs — National Asset Reconstruction Company (NARCL) and India Debt Resolution Company (IDRCL).

NARCL is supposed to acquire stressed assets by making an offer to the lead bank of any consortium of lenders.

It will aim to acquire soured loans worth about ₹2 lakh crore from various commercial banks in phases.

IDRCL will then try to sell the acquired corpus of sticky assets through bids, which should draw international dedicated distressed asset investors.

‘Realistic Price Expectations’

“A big positive will be that global investors will have a single-window platform to deal with,” said Rahul Chawla, co-head of investment banking coverage, Deutsche Bank India. “The most important factor, however, would be the cost of bad loan acquisition from various banks. Price expectations have to be realistic if we want to generate interest among international distressed asset investors.”

nirmala sitharaman, bad bank, north block, finance ministry, ssg capital, deutsche bank, sc lowy

Asset sales will be through a combination of upfront cash and security receipts (SRs), which are effectively debt securities. The government will provide guarantees against those marketable instruments for Rs 30,600 crore.

The backstop arrangement of Rs 30,600 crore suggests 18% realisable value of Rs 2 lakh crore in assets proposed to be acquired, ICICI Securities said in a note on Friday.

Phase I

In the first phase, fully provisioned assets of Rs 90,000 crore have been identified and will be transferred to NARCL. “Once the licence is issued, the process of transferring phase 1 identified legacy stress pools is likely to be completed within three months,” ICICI Securities said.

The remaining assets with lower provisions would be transferred in the second phase.

“Two major issues — fragmented debt holding and realistic pricing of loans — are expected to be addressed while debts are being transferred to NARCL,” said SC Lowy’s Thaker.

If banks transfer a pool of sticky assets to the bad bank at a 50% valuation, they may receive 15% cash and the rest in SRs, of which a sizeable portion will be backed by sovereign guarantee.

“The idea of aggregation of non-performing loans under the bad bank allows decision making and consistency of delivery,” said a senior executive from a South East Asia-based distressed asset buyer. So, the upside for distressed asset investors lies in further enhancing the valuation set by bankers.

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