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Stressed asset fund: a pill for India's bad loans? [Representational Image]: Commuters walk past a bank sign along a road in New Delhi, India, 25 November, 2015.Reuters

As State Bank of India signed a preliminary agreement with Canada's largest asset management company Brookfield to invest in India's stressed asset sector, a few other firms -- both local and foreign -- are eyeing the space.

The funds will reportedly invest in stressed-assets of banks and asset reconstruction companies (ARCs). Investments from the fund will further be used to revive the stress levels on each asset, project or company.

Apart from bringing stability, the turnaround will help arrive at balanced valuation, bridging the valuation divide between the ARCs and the banks, noted a Business Standard report. Historically, ARCs seek for valuing their assets low while banks have sought for an increased valuation.

ARCs are companies that buy out stressed asset at discounted prices to revive them. Stressed asset funds, however, take a balanced view of the asset condition, thereby helping to chalk out a realistic valuation acceptable to both the parties before investing in them.

The recent buzz surrounding the stressed asset fund comes on account of both the central bank and the government tightening the noose around the bank's growing non-performing assets and relaxing rules on bad loan investments, respectively.

"All the indicators are good, insolvency law has been passed and it is a matter of time before deals start getting converted," Dinkar Venkatasubramanian from EY told the Mint. He added that India's colossal bad loans need cleaning up, therefore all funds will find commitments.

Foreign investors like J.C. Flowers & Co, Canada Pension Plan and local players like JM Financial, Edelweiss Financial Services and Srei Alternative Investment Manager are considering to set up such funds.

Edelweiss Financial Services and JM Financial have full-fledged asset reconstruction units of their own. The Mint report noted that Edelweiss is planning a stressed asset fund in the range of $700 million to $1 billion. The company's investment in the space would be one of the largest to be established by an Indian firm.

The company noted that it wished to sit on its investment for nearly six to eight years so as to turn these stressed assets into financially sound valuables.

Indian banks have nearly Rs. 8 lakh crore of gross non-performing assets (NPA).

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