Money Management

India mulls new way to rein in its bad debt burden

By Siddharta Singh

India is considering a new class of alternative investment funds that will focus on acquiring troubled assets from banks and shadow lenders, a move to address some of the world’s highest bad debts.

The fund will be allowed to buy stressed assets directly from banks and non-banking financial firms, people familiar with the matter said, asking not to be identified because the matter is not public. Currently, investors can only access bad debt through securities issued by asset reconstruction companies, but the new fund class will allow them to do so directly. This will give foreign investors, including global hedge funds, easier access to the mountain of local bad debt.

Prime Minister Narendra Modi has spearheaded efforts to revive the economy and a significant part of these efforts relies on increased lending by banks, which opens the risk of a further increase in bad debts due of virus outbreak. Using an alternative investment fund to buy bad debt from banks would help ease the burden on banks as they grapple with what was the worst bad loan ratio in the world even before the coronavirus pandemic. virus virtually halts economic activity thanks to the world’s largest lockdown.

Discussions are at a very preliminary stage and the goal is to complement the efforts of asset reconstruction companies to reduce bad debts from these lenders, the officials said. A finance ministry spokesman was not immediately available for comment.

Alternative investment funds are a class of locally developed and locally regulated hedge funds that have become increasingly popular vehicles for a range of investors from wealthy local investors to struggling global credit funds. Investors must commit at least Rs 1 crore and largely include global hedge funds, wealthy local investors and tycoon investment vehicles.

— With the help of Bijou George.