SBI to float $2-bn distressed asset fund; to bring in global partners

The size of the distressed asset fund is expected to be on the lines of the government of India-backed AIF for distressed housing projects

The country’s largest lender, State Bank of India (SBI), plans to float a distressed asset fund in the new year and will be roping in a global partner to raise money from international investors. 

Rajnish Kumar, chairman, SBI, told Business Standard: “We are expanding our fund management business. At present, SBICAP Ventures, a fund management arm of the group, is managing a realty fund. It is looking at a distressed asset fund too.” 

SBICAP Ventures is creating capabilities to manage the fund, he said. The size of the distressed asset fund is expected to be on the lines of the government of India-backed alternative investment fund (AIF) for distressed housing projects. The size could be up to $2 billion.

“SBICAP Ventures can float such a fund (for stressed assets) only when it has commitment from a strong international partner. Negotiations are going on. The realty fund has given us a lot of confidence,” Kumar said.

The realty AIF, which was announced in November 2019, aims to provide capital for last-mile financing for stressed housing projects. The fund has already garnered Rs 10,530 crore in its first closing. Life Insurance Corporation of India and SBI have contributed 10 per cent each. Four projects have been identified and funds will be released after due diligence.

In 2016, SBI had announced a tie-up with Canada’s Brookfield Asset Management to set up a joint venture with an initial commitment of over $1 billion to make investments in businesses with stressed assets. But the alliance did not see traction.

Kumar said the driving factors for foreign capital’s interest in the Indian stressed asset market are supply of stressed assets, regulatory transparency and robustness, and potential for greater returns on investment compared to other such assets globally.

“The Insolvency and Bankruptcy Code is a big success story with the Supreme Court clearing all issues. Ruchi Soya and RattanIndia Power have been resolved in December quarter. The process of resolving cases like Reliance Communications and Alok Industries is under way and are likely to be resolved in March-June 2019 quarter,” Kumar said.

The prolonged economic downturn in India is expected to postpone asset quality improvement and push gross non-performing assets (NPAs) of banks from 9.3 per cent in September 2019 to 9.9 per cent level by September 2020, according to Reserve Bank of India’s Financial Stability Report. 

An Ernst & Young study estimates the stressed asset market in India at over $150 billion, indicating significant potential for investments. It presents a huge opportunity for foreign capital to participate either through IBC or through out-of-court alternatives such as in collaboration with asset reconstruction companies or through participating in inter creditor agreement transactions. 

Moreover, the revised prudential framework on stressed assets issued by RBI on June 7, 2019 has significantly addressed earlier concerns on the stressed assets resolution rules and also builds in incentives for the early adoption of a resolution plan.