India is considering a new category of alternate investment fund which will focus on acquiring stressed assets from banks and shadow lenders, a move aimed at resolving some of the highest bad debt in the world.

The fund will be allowed to buy stressed assets directly from the banks and non-banking financial companies, people with knowledge of the matter said, asking not to be identified as the matter is not public. At present, investors can only access bad loans through securities issued by asset reconstruction companies, but the new fund category will allow them to do so directly. This will give foreign investors including global hedge funds easier access to the mountain of local bad debt.

Prime Minister Narendra Modi has been spearheading efforts to kick-start the economy and a significant part of this is based on increased lending by the banks which opens up the risk of a further increase in bad debts due to the virus outbreak. Using an alternate investment fund to buy bad debt from banks would help lighten the burden of banks as they grapple with what was the world’s worst bad loan ratio even before the virus pandemic virtually halted economic activity through the world’s biggest lockdown.

The discussions are at a very preliminary stage and the aim is to supplement the efforts of asset reconstruction companies in reducing the bad loans of these lenders, the officials said. A finance ministry spokesman was not immediately available for a comment.

Alternate investment funds are a home-grown and locally regulated class of hedge funds, that have increasingly become popular vehicles for a range of investors from wealthy local investors to global distressed credit funds to use. Investors must commit at least 10 million rupees, and largely comprise global hedge funds, wealthy local investors, and the investment vehicles of tycoons.

— With assistance from Bijou George.