India looks to launch stressed-debt fund, says Jayant Sinha

He also said it was prudent for the Reserve Bank of India to continue with its asset quality review of banks

India is looking to launch a fund to invest in stressed assets, junior finance minister Jayant Sinha said on Tuesday, as regulators strive to clean-up non-performing loans that have stifled banks' lending power in Asia's third-largest economy.

Indian banks are saddled with sour loans of around $120 billion, accounting for 11.5% of their loan portfolio, with most held by state lenders.

The problem loans sitting on their books have made banks wary of lending, choking off funding for projects that are typically financed by banks.

"We will have a significant stressed assets fund," Sinha, India's minister of state for finance, told reporters on the sidelines of an event organised by credit rating agency CRISIL in Mumbai.

"So we expect there will be a vibrant market to be able to take these assets that are in need of equity capital right now over and to bring them back to a high-quality operating performance," he said.

Television channel CNBC TV18 earlier on Tuesday reported India was considering launching a distressed debt fund, with several parties including India's National Investment and Infrastructure Fund (NIIF) and top lender State Bank of India potentially involved.

The minister said the government was working on several options, including one involving SBI, and that details of such a fund were still being finalised.

"We expect a variety of funds - stressed debt fund, special situations fund, and NIIF - to then participate in equity investment in these stressed assets," Sinha said.

The government is also mulling whether to set up a panel to decide on haircuts the banks should take on sour loans, Sinha said.

He also said it was prudent for the Reserve Bank of India to continue with its asset quality review of the banks.

Lenders have reported a surge in bad loans in the six months to March after an asset quality review ordered by the central bank.

India already has more than a dozen asset reconstruction companies (ARCs), but their progress has been stalled by lack of capital and opaque rules.