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FAIR III – Session V Developing the Asian Markets for Non-Performing Assets – India’s Experience November 11, 2003 Presented By: Mr. S. Khasnobis
FAIR III – Session V
Developing the Asian Markets for Non-Performing Assets – India’s Experience
November 11, 2003
Presented By: Mr. S. Khasnobis
FAIR III – Session V
ARCs – Indian ContextARCs – Indian Context
India’s Premier ARC - ArcilIndia’s Premier ARC - Arcil
ARCs – Legal FrameworkARCs – Legal Framework
NPAs in the Indian Banking System
Agenda
FAIR III – Session V
NPAs in the Indian Banking System
Indian banking system witnessed gradual increase in levels of NPAs in the post-liberalisation period Shake-up in real sector
However NPA levels did not threaten to undermine the banking system Tightening of prudential and capital adequacy norms by the
regulator Selective recapitalisation support and mergers of weaker
institutions
FAIR III – Session V
While the problem is not as intense…
Factors Korea Thailand Malaysia Indonesia J apan IndiaRapid deregulationRegulatory failureDeteriorating macroeconomicsAggressive lending practices *Peak level NPAs 30% 40% 25% 50% 20% 15% High Meduim low/ Non-existent
* Including exposure to bubble sectors
FAIR III – Session V
…NPA “stock” merits a systemic response
-
20,000
40,000
60,000
80,000
100,000
120,000
1999 2000 2001 2002
Rs in
cro
re
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
GrossNPA
Net NPA(%)
•Gross NPA levels on the rise•NPA holding cost = 25% of the net profit of the banking system
FAIR III – Session V
ARCs – Indian Context
India’s Premier ARC - ArcilIndia’s Premier ARC - Arcil
ARCs – Legal FrameworkARCs – Legal Framework
NPAs in the Indian Banking SystemNPAs in the Indian Banking System
Agenda
FAIR III – Session V
ARCs in India are set up as a non-government vehicle Minimal government participation in the ARC
resolution process Market forces to consolidate and attractively
package lender interests Create investors’ interest
Support from the banking system – an essential requirement
ARC – Indian model
FAIR III – Session V
Fiscal Incentives to banking system Tax set-offs on sale of asset to ARCs Gains from buy-back of high yield
government bonds to be used for set-off of losses from asset transfer to ARCs
Provision for operation of multiple ARCs
ARC – Indian model
FAIR III – Session V
RapidDisposition
Agency
DebtResolution
Agency
Risk & Rewardstransferred tothe investor
Immediate selldown of debt to
third party investors
Risk & Rewardsretained by the banking system
Focus on Asset
Management & Resolution
The business model – Indian context
ARCs - Generic business models
FAIR III – Session V
Indian ARCs – a Debt Resolution Agency (DRA)
Expeditious resolution of NPA “stock”- a priority Indian NPA profile suggests
Recoveries from NPAs would be over a longer time-frame as against rapid realisation
Predominantly in industrial sector (Low exposure to “bubble” sectors – Real estate/ Capital Markets)
Banking landscape necessitates debt-aggregation One borrower, many lenders (inter-creditor issues) Different security classes and structures Moral hazards related issues
FAIR III – Session V
Markets for NPAs – Non-existent Absence of market makers (limited participation
of foreign lenders in Indian credit market) No pricing bench marks
Debt aggregation and resolution approach is likely to succeed Focus on recoveries from NPAs Improved leverage over debtor through
aggregation Eliminates moral hazards Regulatory empowerment
Indian ARCs –Debt Resolution Agency (DRA)
FAIR III – Session V
Banks/FIs
ARCIL Investor
Sell asset
SRs
Sell debtProceeds
Company
Rest
ruct
urin
g
Debt
se
rvici
ng
Time line t = 0 t = 1 t = 5
Management &
Resolution Sell Down Acquisition
Structured along the DRA model
Value capturing at resolution stage becomes critical for final exit
FAIR III – Session V
ARCs – Indian ContextARCs – Indian Context
India’s Premier ARC - ArcilIndia’s Premier ARC - Arcil
NPAs in the Indian Banking SystemNPAs in the Indian Banking System
ARCs – Legal Framework
Agenda
FAIR III – Session V
Proactive response of government and Central Bank – aimed at NPA resolution Setting-up of Corporate Debt Restructuring
(CDR) forum Enactment of “Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002”
Proposed formation of National Company Law Appellate Tribunal
Addressing the NPA levels
FAIR III – Session V
Regulator Central Bank
Restructuring Asset Sale
Addressing “stock” and “flow” problem
Agencies CDR ARCDebt
Aggregation
Regulation Special Court Tribunal
Self Self empowered empowered
bodybody
Resolution strategies
Access to legal mechanismsAccess to legal mechanisms
Regulatory Empowerment
FAIR III – Session V
Legal Framework (1/2)
Act introduced two important new initiatives to bring about structural reforms to the Indian credit market Setting up of Asset Reconstruction Company Enforcement of securities without the
intervention of the court ARCs requirements
Registered with Central Bank 15% capital adequacy Arcil is the first ARC which has been granted
license by the Central Bank
FAIR III – Session V
Legal Framework (2/2)
ARCs empowered to take following measures for the purpose of asset reconstruction:- Take possession of secured assets Sell or lease a part or whole of the business
of the borrower Change or take over of the management of
the business of the borrower Rescheduling the payment of debt payable
by the borrower Settlement of dues payable by the borrower
FAIR III – Session V
Non Perform
ing Asset
60 day notic
e
75 % se
cured cr
editors’
conse
nt
Enforcement of Security Interest…
FAIR III – Session V
…without court intervention
No intervention of courtOvercoming cumbersome procedural delaysExpeditious recovery
FAIR III – Session V
ARCs – Indian ContextARCs – Indian Context
ARCs – Legal FrameworkARCs – Legal Framework
NPAs in the Indian Banking SystemNPAs in the Indian Banking System
India’s Premier ARC - Arcil
Agenda
FAIR III – Session V
Arcil brings together the complementary strengths of the three largest players in the Indian financial sector
100.0%Total26.5%Other private sponsor banks24.5%ICICI Bank24.5%IDBI24.5%State Bank of India
ShareholdingEquity participation
Sponsors hold 40 % of NPAs of the system Private sector character- 51% shareholding
with private banks/ institutions
FAIR III – Session V
Building Blocks Structure
Resolution
Approach
Investor
FAIR III – Session V
Resolution strategy framework
Loan management strategy Restructuring of loan based on transparent policy
Maximise overall recovery value Fair treatment to all stakeholder
Settlement Asset management strategy – Asset restructuring
Sale of business/collateral Preservation and enhancement of value of
business/collateral Orderly disposition through transparent
process
FAIR III – Session V
Participation from Indian banking system at initial stage – key to value retention
T=0 T=1 TimeNPA Implementati
onof resolution
A performing asset
Return Expectations Rerating as normal
debtRerating
Banks can capture value by staying invested in the assets till the resolution stage
25%
15%
FAIR III – Session V
Man
agem
ent
qual
ity
Industry viabilityLow High
Low
High Settlement with Existing promoters
Restructuring
Strip sale of Assets
Sale of business/Induction of JV
partner
Resolution strategy framework
FAIR III – Session V
Building Blocks Structure
Resolution
Approach
Investor
FAIR III – Session V
BorrowerReconstruction thru’ Restructuring / Asset sale / M&A
Cash realization
Redemption of SRs
SRs
Payment for Subscription to SRs
QIBs(Banks/FIs)
PurchaseConsiderati
on
SchemeBorrower wise
Banks/ FIs
ARCs/ Trusts
Sale of loan assets
Transaction structure - Asset Specific Trust
FAIR III – Session V
Redemption of
Original SRs
Payment for
subscription to
fresh SRs
SRs
Investors
Master Trust / Scheme
Pooling of SRs
QIBs(Banks/FIs)
QIBs(Banks/FIs)
SchemeBorrower A
SchemeBorrower B
Borrowers A,B
Cash realization
Redemption of SRs
Pooling and sale/ Securitisation at Subsequent Stage – Exit for original investors
FAIR III – Session V
Building Blocks Structure
Resolution
Approach
Investor
FAIR III – Session V
Distressed debt investment opportunity
Distressed Company
Direct from Bank / ARC
Asset Pool
Large Portfolio
INVESTORSCORPORATES
Securitization
Fund level
Partner with ARC
Restructuring fund/private equity option
MU
LTIP
LE O
PTIO
NS
AVA
ILA
BLE
Direct investor
Ideally suited for all classes of investors
FAIR III – Session V
Geared to unlock value
Indian economy buoyant and future outlook is positive Right time to tackle NPA problem Maximize value and distribute it back to the
system Re-energize the financial sector Unlock under utilized productive assets
A ‘Win-Win’ model - provides a medium-term structural banking sector solution
FAIR III – Session V
Thank You
