Stressed asset funds may help reduce differences over valuations

Such funds are likely to take a middle path and arrive at a realistic valuation that is acceptable to ARCs and banks

The country's largest lender, State Bank of India (SBI) and Brookfield Asset Management have set up a joint venture (JV) with initial commitment of over $1 billion to make investments in businesses with stressed assets. 

Apart from them, a host of other entities like Srei Alternative Investment Manager, Edelweiss Financial Services and JM Financial are planning to set up similar funds to exploit business opportunities that emerge from bad loans.  

The gross non-performing assets (NPAs) of listed banks jumped to Rs 5.81 lakh crore in March from around Rs 3 lakh crore a year ago. Corporate loans dominated the bad loan accounts in FY16, according to data from Capitaline and compiled by Business Standard's research bureau. State-run banks had bled in the past two quarters as the Reserve Bank of India (RBI) told the lenders to unearth all the bad debts they had. Even some of the big private banks are seeing asset quality stress, and the trend may not change soon given the 'watch list' (loans that could default) they have indicated.

 

At a time when banks are reeling under the pressure of bad debt, stressed asset funds could come to their rescue. These funds invest in troubled assets sold by banks and asset reconstruction companies (ARCs). Once the money is raised, it is used to revive these stressed companies or projects and turn them around. 

However, experts point out that while a turnaround in the debt-ridden company could be favourable for the fund, if the reverse happens they could stand to lose. Also, stressed asset funds are expected to bring some stability while arriving at valuations as, historically, ARCs aim for valuing the asset low while banks seek higher valuation. It is expected that stressed asset funds may take a middle path and arrive at a realistic valuation that is acceptable to both parties. The jury is out on this.