Brookfield Asset Management Inc of Canada and State Bank of India (SBI) have set up a joint venture with an initial investment commitment of over $1 billion in distressed assets.
While Brookfield will commit around Rs 7,000 crore, SBI will contribute up to 5 per cent of the total investments targeted by the venture, which may also rope in other banks at a later stage. The two firms did not give a timeline for the investments, when the venture will be set up or detail the ownership structure. The collaboration will help banks in general and SBI in particular to find alternative solution for resolution of stressed assets, SBI chairman Arundhati Bhattacharya said. The proposed joint venture is unlikely to set up an asset reconstruction company but will instead make equity or mezzanine financing to distressed assets. As per the RBI rules, ARCs can directly buy bad loans from banks.
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Brookfield, which manages about $240 billion of assets globally, has previously invested in the Indian real estate and infrastructure sector. The JV will invest in stressed assets, relying upon Brookfield’s operational expertise to manage recapitalised businesses. Bhattacharya said such an approach will be more acceptable to both the lenders and the borrowers in cases where the promoters are not able to infuse funds and lenders are reluctant to take additional exposure.
“This is a great opportunity for us to continue to invest in the long-term India story, and we’re pleased to be further expanding our private equity platform here,” Brookfield India head Anuj Ranjan said. Kotak Mahindra Group tied up with the Canadian Pension Plan Investment Board (CPPIB) to launch a $525 million fund to invest in the stressed assets. The Canadian Pension Plan Investment Board has committed $450 million and the Kotak Group $75 million. The Financial Stability Report of the Reserve Bank of India had warned that gross non-performing advances (GNPAs) of banks are likely to hit 9.3 per cent by March 2017 “under a severe stress scenario” from 7.6 per cent in March 2016.
Soumyajit Niyogi, associate director, India Ratings & Research, said Rs 6,00,000 crore bad debt in Indian banks currently would require asset reconstruction companies to re-orient themselves if they are to facilitate the resolution process. With the 15 per cent mandatory investment rule and capital constraints, ARCs would need to be supported by third-party capital for any meaningful movement on the bad debt issue, it said.
According to Ind-Ra, an analysis of four key sectors where most of the stressed debt is concentrated (iron and steel, construction and infrastructure, power and textiles) indicates that for the 240 companies the agency analysed, the hair-cuts needed to arrive at sustainable debt for these sectors ranges from 40-70 per cent.