Billionaire’s Fund Says India Bad Loan Battle to Outlast Rajan

  • Indian banks face 2017 deadline and scrutiny over legacy loans
  • Pricing gap for soured loans expected to narrow: Sriniwasan

The head of a credit fund controlled by Indian billionaire Uday Kotak said the government’s push to rid banks of bad loans will outlast the departure of a central bank governor who battled the problem.

Reserve Bank of India Governor Raghuram Rajan, who set a deadline for Indian lenders to clean up their soured debt by March 2017, leaves office in early September. The banking industry’s gross bad-loan ratio jumped to a 13-year high of 7.6 percent at the end of March, underscoring a key challenge for the next central bank head.

“I doubt it whether regulators and policy makers can start going easy,” said S. Sriniwasan, chief executive officer of Kotak Special Situations Credit Fund, which is part of the Kotak Mahindra Group controlled by Kotak. “If one goes by the actions of this government they are unlikely to play along with the so-called crony capitalists.”

During Rajan’s tenure, the government strengthened creditor protections with an overhaul of century-old bankruptcy laws. Any backtracking on such steps could lead to investors losing confidence when the nation’s lenders are battling more than $100 billion of stressed assets and need foreign investment.

Click here for story on lawmaker attacks on possible Rajan successor.

“Foreign investors need to see a continued focus on the financial sector and bankruptcy code reform or else it won’t take long for them to lose confidence,” said Mihir Chandra, head of research for Asia at Hong Kong-based SC Lowy, an independent fixed-income firm.

Foreign investors that have rushed to India include Brookfield Asset Management Inc., Canada’s largest alternative asset manager. It signed a memorandum of understanding with State Bank of India to set up a joint venture to invest in stressed assets in India, according to a statement Wednesday.

Canada Pension Plan Investment Board partnered with Kotak Mahindra Group to invest as much as $525 million in stressed assets in March.

The sheer scale of India’s opportunity has attracted investors, according to Sriniwasan at Kotak Special Situations Credit Fund. The fund is part of the Kotak Mahindra Group’s alternate assets management business, which raised $2.5 billion since it was set up in 2005, according to a statement in March.

Better Prices

“The nature of the problem today requires large sizable checks which was probably not the case 10 years ago,” Sriniwasan said, adding that he expects prices for soured loans to drop. “It looks like we are probably a few quarters away before some of those transactions will start happening at more acceptable prices to investors.”

Indian banks have already made provisions for bad loans which has hurt their profitability. Some of the banks do not have the balance sheet strength to take the hit which has held up soured loan sales. The Indian government said this week it would inject $3.4 billion of capital into state-owned lenders, which helps them to shore up their capital as they face the 2017 deadline.

“Beyond a point, you cannot keep kicking the can down the road,” said Sriniwasan. “We are nearing the end of the road.”

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