Deutsche Bank AG is setting up a unit in India to buy and reorganise soured debt as it seeks to profit from an unprecedented bad-loan clean-up in the nation with one of the world's worst non-performing loan ratios.

The German bank felt the need to have its own asset reconstruction company to buy and reorganise non-performing credit as current Indian rules restrict overseas investors from buying soured loans directly from lenders in the country.

More than 29 ARCs have been set up in India after parliament passed a law in 2002 to help banks clear their balance sheets by selling bad loans. In 2016 Prime Minister Narendra Modi's government tweaked rules to allow overseas investors to fully own asset reconstruction companies, adding another way to buy bad debt besides through tie-ups with local units.

Speculation that authorities might eventually allow foreign investors to bid for soured debt without such tie-ups held back some of them from setting up their own ARCs. But that has yet to happen, and a few have moved toward to create their own asset reconstruction units. While Lone Star Funds has already set up its ARC in India, KKR & Co. has applied for an ARC permit.