India’s distressed debt market is being hobbled by rules that bar foreign funds from directly buying up bank loans, according to Bank of America Corp.

In the past year, the US lender has had to team up with local asset reconstruction companies to purchase loans made to firms including Seven Hills Hospitals and GTL Infrastructure Ltd. that had soured. As it scouts for more opportunities in the nation with the world’s worst non-performing debt ratio, the requirement for local partners is a hindrance, said Jayesh Mehta, country treasurer at Bank of America Merrill Lynch.

Current regulations demand that a foreign bank must bid through the ARC route when a distressed debt is auctioned, Mehta said in an interview. We should have regulations providing direct access for foreign companies to bid without an intermediary. This change is required to create depth in the distressed debt market.

Twenty-nine asset reconstruction companies have been set up in India under a 2002 law passed to help reorganise non-performing credit, RBI data show, though many of these haven’t been active due to a lack of funds.

While overseas investors including KKR & Co., Blackstone Group LP and SSG Capital Management Ltd. have either set up their own asset reconstruction companies in India or bought into existing ones, others like Bank of America and SC Lowy have structured deals through such firms by paying them a fee.

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