India’s Troubled Debt Lures Foreign Asset Managers

India's distressed debt is becoming a hot item for international investors.

High-yield and distressed-debt investors have India in their sights, as local lenders look to liquidate troubled loans.

Firing that momentum is a bankruptcy law initiated two years ago that favors creditors aiming to purchase troubled assets. Indian state-owned banks are sitting on around 90% of the country’s bad loans and the banking system is saddled with an ugly 14.6% non-performing loan (NPL) ratio, far higher than the Asian NPL average of 4%.

That inauspicious tally is partially the result of years of concentration risk in lending to a handful of sectors including steel, power, cement and textiles, where pricing power has deteriorated. As of May, India’s central bank estimated total distressed debt at 8.77 trillion rupees (US$124 billion).

Until quite recently, foreign entities had virtually no presence in India’s distressed debt and asset markets. But the country’s economy is far larger today, and the regulatory regime is perceived as more investment-friendly.

“The opportunity to purchase assets from a banking sector looking to tidy up its balance sheets is such that we have decided to establish a local presence,” says Michel Löwy, co-founder of international banking and finance group SC Lowy, which is slated to open an office in Mumbai in the first quarter of this year.

Other firms attracted to India’s distressed-debt market include US-based Oaktree Capital and BlackRock, both rumored to be setting up local offices. Baring Private Equity Asia, KKR, Blackstone Group and Apollo Global are also said to be looking to establish a local presence.

The country’s fledgling distressed-debt sector faces challenges, including a dearth of comprehensive data, cash leakage and fraud. Nevertheless, the wealth of potentially lucrative assets is proving sufficient to prompt distressed-market specialists to describe the Indian market as on the verge of a “gold rush.”