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Indian billionaire fund says bank boost to help clear loans

[HONG KONG] The head of a credit fund under Indian billionaire Uday Kotak's financial group says the government's pledge of capital for beleaguered state banks could make it easier for distressed funds to buy loans.

The Indian government said last week that it will inject 2.11 trillion rupees (S$44.3 billion) of capital into state-controlled lenders over two years, as it seeks to revive growth in Asia's third-largest economy. Distressed debt funds finding it easier to buy loans could help banks plagued by the highest stressed-asset ratio in nearly two decades to start lending more again.

"This recap could accelerate resolution of loans and perhaps the clearing price in the market may now be acceptable," said S. Sriniwasan, managing director of Kotak Investment Advisors, which is part of Kotak Mahindra Bank, whose principal founder is Kotak.

India has attracted distressed debt funds to its bad loan clean-up, but they face challenges deploying money as lenders are often not willing to sell off their loans at a deep enough discount. The government's capital injection should enable banks to take the necessary 'haircuts' on their nonperforming assets, according to S&P Global Ratings.

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The Kotak Mahindra Group had signed an agreement with Canada Pension Plan Investment Board for investment in stressed assets in India in March 2016, with the latter able to invest as much as US$450 million. However, Kotak's stressed-asset fund deal with Canada Pension Plan Investment Board was called off as opportunities with appropriate returns were not available, according to the bank's chief financial officer Jaimin Bhatt last week.

For Kotak, despite the opportunities in India's debt clean-up, closing deals has proved to be elusive. "We have looked at situations but they have not closed largely because the clearing price was not to the expectation of the sellers," Mr Sriniwasan said. "The bid ask spread for bad loans has not closed completely." The Indian government's capital injection also gives banks the "fire power" to start lending, which can kick-start growth in the economy, said Mr Sriniwasan, who manages $2.8 billion of assets in funds including special situations credit and private equity funds. India's cabinet last week approved a plan to build 83,667 kilometers of roads, highways and bridges in the next five years.

However, the fund is also treading cautiously amid other challenges including an evolving bankruptcy process, according to Sriniwasan.

"There has been significant movement under the new bankruptcy laws and we are well on our way to discover the challenges of implementing this law," said Mr Sriniwasan. "There is enough food on the table so there is no need to rush to the buffet."

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