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Developing the Asian Markets for Non-Performing Assets – India’s Experience. November 11, 2003. Presented By: Mr. S. Khasnobis. Agenda. NPAs in the Indian Banking System. ARCs – Indian Context. ARCs – Legal Framework. India’s Premier ARC - Arcil. NPAs in the Indian Banking System.

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developing the asian markets for non performing assets india s experience

Developing the Asian Markets for Non-Performing Assets – India’s Experience

November 11, 2003

Presented By: Mr. S. Khasnobis

slide2

Agenda

NPAs in the Indian Banking System

ARCs – Indian Context

ARCs – Legal Framework

India’s Premier ARC - Arcil

npas in the indian banking system
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
while the problem is not as intense
While the problem is not as intense…

* Including exposure to bubble sectors

npa stock merits a systemic response
…NPA “stock” merits a systemic response
  • Gross NPA levels on the rise
  • NPA holding cost = 25% of the net profit of the banking system
slide6

Agenda

NPAs in the Indian Banking System

ARCs – Indian Context

ARCs – Legal Framework

India’s Premier ARC - Arcil

arc indian model
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
arc indian model1
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
the business model indian context
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

ResolutionAgency

Focus on

Asset

Management

& Resolution

Risk & Rewards

retained by the

banking system

indian arcs a debt resolution agency dra
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
indian arcs debt resolution agency dra
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
structured along the dra model
Structured along the DRA model

Acquisition

Management

&

Resolution

Sell Down

Sell asset

Sell debt

Banks/FIs

ARCIL

Investor

Proceeds

SRs

Debt servicing

Restructuring

Company

Time line

t = 0

t = 5

t = 1

Value capturing at resolution stage becomes critical for final exit

slide13

Agenda

NPAs in the Indian Banking System

ARCs – Indian Context

ARCs – Legal Framework

India’s Premier ARC - Arcil

addressing the npa levels
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
addressing stock and flow problem
Addressing “stock” and “flow” problem

Regulatory Empowerment

RegulatorCentral Bank

Self empowered body

Debt Aggregation

AgenciesCDR ARC

Resolution strategies

Restructuring Asset Sale

Access to legal mechanisms

Regulation

Tribunal

Special Court

legal framework 1 2
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
legal framework 2 2
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
slide18

Non Performing Asset

60 day notice

75 % secured creditors’consent

Enforcement of Security Interest…

without court intervention
…without court intervention

No intervention of court

Overcoming cumbersome procedural delays

Expeditious recovery

slide20

Agenda

NPAs in the Indian Banking System

ARCs – Indian Context

ARCs – Legal Framework

India’s Premier ARC - Arcil

slide21

Equity participation

Shareholding

State Bank of India

24.5%

IDBI

24.5%

ICICI Bank

24.5%

Other private sponsor banks

26.5%

Total

100.0%

Arcil brings together the complementary strengths of the three largest players in the Indian financial sector
  • Sponsors hold 40 % of NPAs of the system
  • Private sector character- 51% shareholding with private banks/ institutions
slide22

Resolution

Building Blocks

Structure

Approach

Investor

resolution strategy framework
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
participation from indian banking system at initial stage key to value retention
Participation from Indian banking system at initial stage – key to value retention

25%

15%

Rerating

Rerating as normal debt

Banks can capture value by staying invested in the assets till the resolution stage

resolution strategy framework1
Resolution strategy framework

Settlement with

Existing promoters

Restructuring

High

Management quality

Strip sale of

Assets

Sale of business/

Induction of JV partner

Low

Low

Industry viability

High

slide26

Resolution

Building Blocks

Structure

Approach

Investor

transaction structure asset specific trust

Borrower

Purchase

Consideration

Reconstruction thru’

Restructuring /

Asset sale / M&A

Cash

realization

SRs

Redemption

of SRs

QIBs

(Banks/FIs)

Payment for Subscription to SRs

Transaction structure - Asset Specific Trust

Banks/ FIs

Sale of loan assets

ARCs/

Trusts

Scheme

Borrower wise

pooling and sale securitisation at subsequent stage exit for original investors

Scheme

Borrower A

Scheme

Borrower B

QIBs

(Banks/FIs)

QIBs

(Banks/FIs)

Pooling and sale/ Securitisation at Subsequent Stage – Exit for original investors

Borrowers

A,B

Pooling of SRs

Redemption of Original SRs

Cash

realization

Master Trust

/ Scheme

Payment for subscription to fresh SRs

Redemption

of SRs

SRs

Investors

slide29

Resolution

Building Blocks

Structure

Approach

Investor

distressed debt investment opportunity
Distressed debt investment opportunity

CORPORATES

INVESTORS

MULTIPLE OPTIONS AVAILABLE

Restructuring fund/private equity option

Distressed Company

Direct investor

Partner with ARC

Direct from Bank / ARC

Securitization

Asset Pool

Fund level

Large Portfolio

Ideally suited for all classes of investors

geared to unlock value
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