presentation on non performing assets of the bank

its a ppt on non performing asset

1. FAIR III –Session V
Developing the Asian Markets for Non-
Performing Assets –India’s Experience
November 11, 2003
Presented By: Mr. S. Khasnobis

2. FAIR III –Session V
ARCs –Indian Context
India’s Premier ARC -Arcil
ARCs –Legal Framework
NPAs in the Indian Banking System
Agenda

3. 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

4. FAIR III –Session V
While the problem is not as intense…Factors KoreaThailandMalaysiaIndonesiaJapanIndia
Rapid deregulation
Regulatory failure
Deteriorating macroeconomics
Aggressive lending practices *
Peak level NPAs 30% 40% 25% 50%20%15%
High Meduim low / Non-existent
* Including exposure to bubble sectors

5. 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 crore
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
Gross
NPA
Net NPA
(%)
•Gross NPA levels on the rise
•NPA holding cost = 25% of the net profit of the banking system

6. FAIR III –Session V
ARCs –Indian Context
India’s Premier ARC -Arcil
ARCs –Legal Framework
NPAs in the Indian Banking System
Agenda

7. 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

8. 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

9. FAIR III –Session V
Rapid
Disposition
Agency
Debt
Resolution
Agency
Risk & Rewards
transferred to
the investor
Immediate sell
down of debt to
third party
investors
Risk & Rewards
retained by the
banking system
Focus on
Asset
Management
& Resolution
The business model –Indian context
ARCs -Generic business models

10. 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

11. 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)

12. FAIR III –Session V
Banks/FIs ARCIL Investor
Sell asset
SRs
Sell debt
Proceeds
Company
Restructuring
Time line
t = 0 t = 1 t = 5
Management
&
Resolution
Sell DownAcquisition
Structured along the DRA model
Value capturing at resolution stage becomes critical for final exit

13. FAIR III –Session V
ARCs –Indian Context
India’s Premier ARC -Arcil
NPAs in the Indian Banking System
ARCs –Legal Framework
Agenda

14. 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

15. FAIR III –Session V
Regulator Central Bank
Restructuring Asset Sale
Addressing “stock” and “flow” problem
Agencies CDR ARC
Debt
Aggregation
Regulation Special Court Tribunal
Self
empowered
body
Resolution
strategies
Access to legal mechanisms
Regulatory
Empowerment

16. 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
Enforcementofsecuritieswithouttheinterventionof
thecourt
ARCsrequirements
RegisteredwithCentralBank
15%capitaladequacy
ArcilisthefirstARCwhichhasbeengrantedlicense
bytheCentralBank

17. FAIR III –Session V
Legal Framework (2/2)
ARCsempoweredtotakefollowingmeasuresfor
thepurposeofassetreconstruction:-
Takepossessionofsecuredassets
Sellorleaseapartorwholeofthebusinessof
theborrower
Changeortakeoverofthemanagementofthe
businessoftheborrower
Reschedulingthepaymentofdebtpayableby
theborrower
Settlementofduespayablebytheborrower

18. FAIR III –Session V
Enforcement of Security Interest…

19. FAIR III –Session V
…without court intervention
No
intervention of
court
Overcoming
cumbersome
procedural
delays
Expeditious
recovery

20. FAIR III –Session V
ARCs –Indian Context
ARCs –Legal Framework
NPAs in the Indian Banking System
India’s Premier ARC -Arcil
Agenda

21. FAIR III –Session V
Arcil brings together the complementary
strengths of the three largest players in the
Indian financial sector
100.0%Total
26.5%Other private sponsor
banks
24.5%ICICI Bank
24.5%IDBI
24.5%State Bank of India
ShareholdingEquity participation
Sponsors hold 40 % of NPAs of the system
Private sector character-51% shareholding with
private banks/ institutions

22. FAIR III –Session V
Building
Blocks Structure
Resolution
Approach
Investor

23. 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

24. FAIR III –Session V
Participation from Indian banking system
at initial stage –key to value retention
T=0 T=1 Time
NPA Implementation
of 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%

25. FAIR III –Session V
Management quality
Industry viabilityLow High
Low
High
Settlement with
Existing promoters
Restructuring
Strip sale of
Assets
Sale of business/
Induction of JV partner
Resolution strategy framework

26. FAIR III –Session V
Building
Blocks Structure
Resolution
Approach
Investor

27. FAIR III –Session V
Borrower
Reconstruction thru’
Restructuring /
Asset sale / M&A
Cash
realization
Redemption
of SRs
SRs
Payment for
Subscription to SRs
QIBs
(Banks/FIs)
Purchase
Consideration
Scheme
Borrower wise
Banks/ FIs
ARCs/
Trusts
Sale of loan
assets
Transaction structure -Asset Specific
Trust

28. 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)
Scheme
Borrower A
Scheme
Borrower B
Borrowers
A,B
Cash
realization
Redemption
of SRs
Pooling and sale/ Securitisation at Subsequent
Stage –Exit for original investors

29. FAIR III –Session V
Building
Blocks Structure
Resolution
Approach
Investor

30. 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
Direct investor
Ideally suited for all classes of investors

31. 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

32. FAIR III –Session V
Thank You