NEW DELHI: Henry Kravis , one of the stars of the 1980s leveraged buyout boom, said the Indian banking system’s bad-loan problem needs to be sorted out quickly and he knows how it can be done. "I’m a big believer of a good bank and a bad bank," the co-chairman of investment firm Kohlberg Kravis Roberts told ET in an interview."The problem of bad loans will never get smaller, so the more you delay, the hole will just get deeper. It’s already late and you can’t wait any longer." India’s banks are weighed down with $180 billion of stressed assets, acting as a brake on the growth prospects of the world’s fastest-expanding major economy. "I would say the solution is to start privatising these banks ... it can be a public-private partnership model with new capital coming in from the private sector," said Kravis.During his four days in India, Kravis’ schedule was crammed with meetings — with a few industry captains, top politicians and bureaucrats, besides entrepreneurs. KKR — launched four decades ago by cousins Kravis and George Roberts along with their boss Jerome Kohlberg Jr with $120,000 after quitting Bear Stearns — has been proactively engaged with the Centre on the new bankruptcy code KKR produced a white paper on the subject after Kravis told Narendra Modi that India lacked proper bankruptcy laws during his first visit to the US in 2014, soon after becoming prime minister.“I have never seen a government move so fast,” Kravis said. “He (Modi) was back in New York six-nine months later and he told me ‘we're doing it’. And now what I hear from the lawyers is that it is a pretty darn good code.” The bankruptcy code was approved by Parliament in May last year. Kravis said debt resolution will be politically unpopular but feels there is no alternative. Equally unpalatable will be the change of management in such scenarios.His prescription is this: Quantify bad loans as per their fair-market value and not by oft-used matrices like replacement costs, and sell them to asset reconstruction companies (ARCs) with a haircut. That will affect the net worth of the banks and that’s where the government needs to step in to recapitalise balance sheets by selling shares to lower state ownership to below 51%.To build political consensus, Kravis feels priority sector lending obligations will need to be met even after privatisation. The exercise needs to be conducted across the board without exceptions.“You just place a threshold and say across every industry if the loan is substandard by a certain value or percentage then it goes into the pool and the government tells the banks that we bridge your equity,” Kravis said. “Banks have to go back to lending once again. In India, they are still the main source of capital.”KKR has already deployed the largest pool of foreign direct investment (FDI) in the country, investing $8 billion in eight years with an equal share of debt and equity. But that is still 6% of its global portfolio of around $131 billion of assets under management. Kravis is clear that it will get “bigger” and “transformational” from here on in.“We are entering into a new phase of evolution, where we will be able to be a total solutions provider to local corporates across their capital structure — equity, senior debt, mezzanine to working capital to structured finance and everything in between,” he said. “For bad debt, KKR is also launching a brand new ARC.”The India strategy hinges on themes, rather than sectors alone. “We will be looking at investing behind domestic consumption themes, globally competitive export businesses which can benefit from our global network and expertise, and increasingly focus on buyouts and divestures,” Kravis said.Funding will be another central component. “In the future, you’ll see us extending even more capital to mid-market and small businesses across sectors. We see this as the second phase of our NBFC (non-banking finance company) business and away to provide even more financial solutions to companies,” he said.KKR estimates more than 5,000 such homegrown companies with a requirement exceeding $40 billion. Kravis doesn’t see himself logging onto India’s consumer Internet story though. “We’re not particularly good at investing in venture capital and startups. I do it personally and I don’t know if it’s any better than going to a casino,” he said.Arguing that in a market like India there will eventually be just two survivors, Kravis said, “You’ve seen Flipkart raising a billion dollars here. We do such investments through our growth fund. We may look at such investments but I think even at $10 billion for Flipkart the valuations are still high, even though they are less than the earlier valuation of $15 billion.”