Banks may set up 2 stressed asset funds: Sources

The Indian Banks' Association (IBA) has approached the Reserve Bank of India (RBI) with a suggestion to create a special situations fund.

The proposal made on May 16 included setting up two stressed asset funds instead of one special situations fund. In the two-fold exercise, funds can be Stressed Assets Equity Fund (SAEF) and Stressed Asset Lending Fund (SALF).

CNBC-TV18’s Sapna Das reports that SAEF may have equity contribution from the government possibly through the National Investment and Infrastructure Fund (NIIF). In addition to this, banks, insurers and overseas investors may also contribute to SAEF and SALF.SAEF is likely to invest in the equity of stressed borrowers and may take controlling stake directly or via strategic debt restructuring as well. It will neither borrow nor lend, but will invest only in the equity of stressed companies.

SALF, on the other hand, may provide last-mile funding, working capital funding to stressed assets and may be allowed to raise debt and lend to stressed companies. This fund will not be allowed to invest in the equity of stressed entities and may be set up with equity contribution from government through NIIF.