Modi tack­les $117b of bad debt by eas­ing rules for buy­ers

The Pak Banker - - 6BUSINESS -

Fac­ing a daunting 8 tril­lion ru­pees ($117 bil­lion) of stressed as­sets in its fi­nan­cial sys­tem, In­dia is step­ping up ef­forts to tackle an is­sue that is threat­en­ing to de­rail Prime Min­is­ter Naren­dra Modi's de­vel­op­ment agenda.

In a boost to a 700 bil­lion-ru­pee re­cap­i­tal­iza­tion pro­gram al­ready un­der way, the govern­ment al­lowed a sin­gle in­vestor to fully own an as­set re­con­struc­tion com­pany, mak­ing it eas­ier to raise cap­i­tal. An ear­lier rule capped the own­er­ship at 50 per­cent. ARCs buy bad loans and col­lat­eral from lenders, and work on re­cov­ery by re­vamp­ing busi­nesses and as­sets.

"The in­dus­try was con­strained so far due to the 50 per­cent limit on spon­sor's share hold­ing," said Siby Antony, chief ex­ec­u­tive of­fi­cer at Mum­bai-based Edelweiss As­set Re­con­struc­tion Co., the na­tion's big­gest. His firm will now seek more funds from its par­ent Edelweiss Fi­nan­cial Ser­vices Ltd., he said.

The suc­cess of ARCs is cru­cial to re­viv­ing credit growth in the $2 tril­lion econ­omy as lenders sad­dled with stressed as­sets at a 14-year high strug­gle to clean up their bal­ance sheets. Modi needs the na­tion's banks to get back on their feet at the ear­li­est to help trans­form his vi­sion of cre­at­ing jobs through faster growth into re­al­ity.

While pre­sent­ing the fed­eral bud­get for the year start­ing April 1, Modi's Fi­nance Min­is­ter Arun Jait­ley eased the own­er­ship rule for ARCs and also sig­naled he may raise the limit on for­eign own­er­ship from 74 per­cent. He also al­lo­cated 250 bil­lion ru­pees for re­cap­i­tal­iza­tion of state-owned lenders for the year start­ing April 1, same as the out­lay in the cur­rent year.

ARCs are ex­pect­ing record busi­ness af­ter Re­serve Bank of In­dia Gov­er­nor Raghu­ram Ra­jan set lenders a March 2017 dead­line to clean up their bal­ance sheets. He al­lowed those com­plet­ing a deal by March to spread losses from the dis­tressed-as­set sale over two years.

Stressed bank loans in In­dia, in­clud­ing soured and re­struc­tured debt, are es­ti­mated at about 8 tril­lion ru­pees, ac­cord­ing to Ju­nior Fi­nance Min­is­ter Jayant Sinha. Edelweiss ARC, which has taken more than 550 bil­lion ru­pees of soured debt, is the largest buyer in In­dia.

ARCs bought about 70 bil­lion ru­pees of the 380 bil­lion ru­pees of bad debt banks of­fered in the nine months through De­cem­ber, said Antony of Edelweiss. KKR & Co., the buy­out firm founded by Ge­orge R. Roberts and Henry R. Kravis, said that the govern­ment's move will help lenders clean up their bal­ance sheets. "It's a step in the right di­rec­tion to cap­i­tal­ize the as­set re­con­struc­tion com­pa­nies," San­jay Na­yar, chief ex­ec­u­tive of­fi­cer for KKR's In­dia unit, said by phone. KKR will buy a stake in Mum­bai-based In­ter­na­tional As­set Re­con­struc­tion Co., the Eco­nomic Times news­pa­per re­ported on Jan. 6.

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