The smart investor perceives a range of opportunities through participation in the distressed asset markets as it provides a plethora of options to enhance the value of his investments in leaps and bounds promptly. However, at macro level ‘Pareto optimal’ solutions elude the market as demand and supply side bottlenecks act as impediments in development of the balanced market for the stressed assets.
A ‘market’ is a coordinating mechanism that allows determination of price and conveys information among economic entities. A market for distressed assets does precisely so. In the absence of such markets, the risk associated with credit extension tends to crowd out funds critical for economic growth. State intervention for alleviation of this risk, by facilitating coordination among economic agents for trading of distressed assets, plays a crucial role in maintaining the financial health of an economy.
India is one of the fastest-growing economies and the fifth largest in the world. The average growth rate over the last three decades has been about 7 percent. The country has witnessed an improved investment climate with enhanced competitiveness and innovation over the years.
It is but natural to see a continuous flow of distressed assets into the market given the large size of the economy and its growth. This warrants effective mechanisms for their resolution. With the cherished goal of achieving a milestone of $ 5 trillion economy in sight, systematic efforts are required to be in place for release of the large number of investments locked up in the stressed assets for productive usage.
In India, the Economic Surveys shed light on the issue of the twin balance sheet problem of rising indebtedness of Indian firms and rising nonperforming loans in the banking system during 2015-16. It drew attention to the state of public sector banks and some corporate houses. The primary reasons as observed by Reserve Bank of India (RBI) for spurt in stressed assets have been observed to be, inter alia, aggressive lending practices, willful default / loan frauds / corruption in some cases, and economic slowdown.
Pertinently, recent supervisory data suggests that numerous efforts made by the RBI in firming up its regulatory and supervisory agenda and the resolution mechanism founded through the Insolvency and Bankruptcy Code, 2016 (Code/IBC) are leading to fruition in resolution of nonperforming assets (NPAs).As per the various issues of RBI Financial Stability Reports, there has been a substantial decline in gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) from as high as 14.6 percent in FY 2018 to 5.53 percent in FY 2022. As of March,2022 the total NPAs in the economy stand at 5.42 trillion Indian rupees.
Developing a market for distressed assets is important for an emerging economy like India where the corporate bond market is under penetrated and market participants are heavily reliant on loans from banks. With banks reeling under mounting NPAs, the need of the hour is to have a well-developed distressed assets market to off load these NPAs effectively.
To deal with the problem of NPAs effectively, one of the many strategies is to develop a market for distressed assets. A secondary market for NPAs would reduce the debt collection burden on banks and free up resources and capital to support new lending. It would also enhance bank’s risk management strategy by providing another instrument to manage credit and market risks.
A market for distressed assets would also support corporate restructuring and expand sources of financing. It would improve secondary market liquidity for loans and attract a wider range of institutional investors to assist in corporate restructuring. In the near term, a market for distressed assets could support a faster recovery by facilitating the exit of non-viable firms and supporting the growth of viable ones. Over time, it would enable reallocation of resources towards more productive corporates and assist their reorganisation and expansion.
Distressed assets investment firms have appeared on the horizon, as part of a global asset management industry. They are adept at generating capital from sophisticated investors in specialist investment purpose vehicles.
These firm have played an integral role in some of the major corporate resuscitations over the last three decades – Sunbeam-Oster, Samsonite, National Gypsum in the junk bonds predicament during 1990–91; big financial organisations in East Asia in the Asian crisis of 1997–98; and more recently General Motors, Chrysler, and Nine Entertainment (Australia).