Developing the Asian Markets for NonPerforming Assets – India’s Experience
Presented By: Mr. S. Khasnobis
November 11, 2003
FAIR III – Session V
Agenda
NPAs in the Indian Banking System
ARCs – Indian Context
ARCs – Legal Framework
India’s Premier ARC - Arcil
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
Rapid deregulation
Regulatory failure
Deteriorating macroeconomics
Aggressive lending practices *
Peak level NPAs
High
Meduim
Korea Thailand Malaysia Indonesia Japan India
30%
40%
25%
50% 20% 15%
low / Non-existent
* Including exposure to bubble sectors
FAIR III – Session V
…NPA “stock” merits a systemic
response
120,000
8.5%
Rs in crore
100,000
8.0%
80,000
7.5%
Gross
NPA
60,000
7.0%
Net NPA
(%)
40,000
6.5%
20,000
-
6.0%
1999
2000
2001
2002
•Gross NPA levels on the rise
•NPA holding cost = 25% of the net profit of the banking system
FAIR III – Session V
Agenda
NPAs in the Indian Banking System
ARCs – Indian Context
ARCs – Legal Framework
India’s Premier ARC - Arcil
FAIR III – Session V
ARC – Indian model
 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
FAIR III – Session V
ARC – Indian model
 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
FAIR III – Session V
The business model – Indian context
ARCs - Generic business models
Rapid
Disposition
Agency
Immediate sell
down of debt to
third party
investors
Risk & Rewards
transferred to
the investor
Debt
Resolution
Agency
Focus on
Asset
Management
& Resolution
Risk & Rewards
retained by the
banking system
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
Indian ARCs –Debt Resolution
Agency (DRA)
 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
FAIR III – Session V
Structured along the DRA model
Management
&
Resolution
Banks/FIs
Sell asset
SRs
Time line
t=0
ARCIL
Sell Down
Sell debt
Investor
Proceeds
Restructuring
Acquisition
Company
t=1
t=5
Value capturing at resolution stage becomes critical for final exit
FAIR III – Session V
Agenda
NPAs in the Indian Banking System
ARCs – Indian Context
ARCs – Legal Framework
India’s Premier ARC - Arcil
FAIR III – Session V
Addressing the NPA levels
 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
FAIR III – Session V
Addressing “stock” and “flow” problem
Regulator
Agencies
Resolution
strategies
Central Bank
Self
empowered CDR
body
Restructuring
Regulatory
Empowerment
Debt
Aggregation
ARC
Asset Sale
Access to legal mechanisms
Regulation
Special Court
Tribunal
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
Enforcement of Security Interest…
FAIR III – Session V
…without court intervention
No
intervention of
court
Overcoming
cumbersome
procedural
delays
Expeditious
recovery
FAIR III – Session V
Agenda
NPAs in the Indian Banking System
ARCs – Indian Context
ARCs – Legal Framework
India’s Premier ARC - Arcil
FAIR III – Session V
Arcil brings together the complementary
strengths of the three largest players in the
Indian financial sector
Equity participation
State Bank of India
IDBI
ICICI Bank
Other private sponsor
banks
Total


Shareholding
24.5%
24.5%
24.5%
26.5%
100.0%
Sponsors hold 40 % of NPAs of the system
Private sector character- 51% shareholding with
private banks/ institutions
FAIR III – Session V
Resolution
Building
Blocks
Approach
Structure
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
25%
15%
Return
Expectations
Rerating
Rerating as normal debt
T=0
T=1
NPA
Implementation
of resolution
Time
A performing asset
Banks can capture value by staying invested
in the assets till the resolution stage
FAIR III – Session V
Resolution strategy framework
Management quality
High
Settlement with
Restructuring
Existing promoters
Strip sale of
Sale of business/
Assets
Induction of JV partner
Low
Low
Industry viability
High
FAIR III – Session V
Resolution
Building
Blocks
Approach
Structure
Investor
FAIR III – Session V
Transaction structure - Asset Specific
Trust
Banks/ FIs
Sale of loan
assets
Purchase
Consideration
ARCs/
Trusts
Reconstruction thru’
Restructuring /
Asset sale / M&A
Borrower
Cash
realization
Scheme
Borrower wise
SRs
Redemption
of SRs
QIBs
Payment for
Subscription to SRs
(Banks/FIs)
FAIR III – Session V
Pooling and sale/ Securitisation at Subsequent
Stage – Exit for original investors
Scheme
Borrower A
Scheme
Borrower B
QIBs
(Banks/FIs)
QIBs
(Banks/FIs)
Redemption
of Original
SRs
Pooling of
SRs
Borrowers
A,B
Cash
realization
Master Trust
/ Scheme
Payment for
subscription
to fresh SRs
SRs
Redemption
of SRs
Investors
FAIR III – Session V
Resolution
Building
Blocks
Approach
Structure
Investor
FAIR III – Session V
Distressed debt investment opportunity
CORPORATES
Direct investor
INVESTORS
Restructuring fund/private
equity option
Distressed
Company
Partner with ARC
Direct from
Bank / ARC
Asset Pool
Securitization
Fund level
Large
Portfolio
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
FAIR III – Session V