Asset reconstruction industry of India
March, 2013
Indian financial institutions have large NPAs and write-offs
Gross advances by Indian financial ... with increasing Gross NPA levels in
institutions are large ... recent times
Gross advances in FY12 (INR b) Gross NPA ratios for SCBs (%)2
60,000 10 8.8
8,200 55,001
7.2
2,423
6,500 5.2
7,000
40,000 2,333 5
35,545 3.3 3.5
3.1
2.5 2.3 2.4 2.5
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
2.3
53,801
0
20,000
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13P
Gross NPA levels expected to increase given
0 RBI norms on restructured assets
PSUs Old New Foreign NBFCs1 Total • Higher provisioning for restructured assets
private private
• From April 1, 2015, restructured accounts
would be classified as sub-standard NPAs
1. Top 27 NBFCs in India considered for the sizing purpose 2. Based on RBI's annual publication "Trends in banking report". FY13P based on Crisil Research projections 3. Calculated bottom-up
from the annual reports of all SCBs and top 27 NBFCs
Source: RBI, Crisil Research, IBA datasheet, Capitaline, Prowess, Annual reports of all banks and top 27 NBFCs
BCG_India ARC industry_v2.pptx Draft—for discussion only 1
Total retail & MSME1 bad debts were ~INR 500 b in India (FY12)
Market size for retail and MSME bad debts (Doubtful and loss NPAs2 + two year write-offs)
Recent retail and MSME bad debts (INR b)
13 500
500 60
90
13 2
15
17 6
400
30 6
98 3 3
300
NBFCs currently not
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
allowed to sell bad
63 debts to ARCs
200 410
120
100
NBFCs
55
SCBs
0
Micro Small Medium Housing LAS Gold Commercial Tractors Cars 2-3 Education Credit Consumer Other MSME Total
enterprises enterprises enterprises loans vehicles Wheelers cards durables personal unsecured
secured secured secured
1. MSME – Micro, small and medium enterprises (Includes all businesses having turnover of between approximately INR 10 lacs to INR 10 Crores per annum) 2. Have been NPAs for more than 1 year
Note: Split between share of NBFCs and SCBs has been shown for the major loan categories
Source: RBI, Crisil, FIBAC 2011 BCG study, annual reports of banks and NBFCs, analyst and research reports, Capitaline data on mid and large corporates in India, BCG Analysis
BCG_India ARC industry_v2.pptx Draft—for discussion only 2
Market for retail and MSME1 bad debts will increase to ~ INR
950 b in India by FY18
Market size for retail and MSME bad debts (Doubtful and loss NPAs2 + two year write-offs)
Recent retail and MSME bad debts (INR b)
1,000
25 950
128
155
25 4
800 29
21 8
36 8
190 7 6
600 NBFCs currently not
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
allowed to sell bad
125 debts to ARCs
400 795
230
200
NBFCs
110
SCBs
0
Micro Small Medium Housing LAS Gold Commercial Tractors Cars 2-3 Education Credit Consumer Other MSME Total
enterprises enterprises enterprises loans vehicles Wheelers cards durables personal unsecured
secured secured secured
1. MSME – Micro, small and medium enterprises (Includes all businesses having turnover of between approximately INR 10 lacs to INR 10 Crores per annum) 2. Have been NPAs for more than 1 year
Note: Split between share of NBFCs and SCBs has been shown for the major loan categories
Source: RBI, Crisil, FIBAC 2011 BCG study, annual reports of banks and NBFCs, analyst and research reports, Capitaline data on mid and large corporates in India, BCG Analysis
BCG_India ARC industry_v2.pptx Draft—for discussion only 3
Gross NPA levels are expected to increase with restructured
assets being classified as sub-standard NPAs
Restructured corporate debts have Classification of restructured assets as
undergone significant increase sub-standard NPAs
Debt approved for restructuring (INR b)1 RBI is tightening the norms for restructured
1,000 corporate debt
• Provisioning requirement for fresh
800 restructured assets increased to 5% from
2.75% w.e.f. 1 April 20132
600 • Draft guidelines to classify restructured assets
sub-standard NPAs from 1 April 20153
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
400
615
Norms made stringent to discourage banks to
resort to restructuring as first line of defense
200 396
• Sectors under stress include steel, textiles,
178
66 infrastructure and airlines
0
FY10 FY11 FY12 FY13 (YTD &
exp annual) Added pressure on banks expected to provide
the necessary impetus for sales of bad debts
Total loans restructured by banks under CDR • Impact to be felt in the medium term
route crossed INR 2 trillion in Dec'12
1. All references for corporate debt restructuring by lenders/borrowers are made to the CDR Cell, the third tier of the CDR Mechanism in India, mandated to assist the CDR Standing Forum and the
CDR Empowered Group (EG) in all their functions. Once the final restructuring plan is approved and confirmed by the Empowered Group, CDR Cell issues a Letter of Approval (LOA) for the
Restructuring package to all the concerned lenders. 2. For existing restructured loans, banks have to increase provisioning to 3.75% over the four quarters of 2013-14, and to 5% over the four
quarters of 2014-15 3. Draft guidelines based on recommendations of the B Mahapatra panel
Source: www.cdrindia.org, Macquarie equity research report on CDR in India 2012, RBI,
BCG_India ARC industry_v2.pptx Draft—for discussion only 4
What we heard from banks and ARCs in interviews
Select quotes from customers – Not indicative of the entire market
Banks on ARCs ARCs on Banks
"We are eager to sell unsecured bad " PSUs not selling commensurate to
debt but cannot find buyers" their significant levels of NPAs "
Opening of
bad debt
market "Restructured debts will eventually be
"We are increasing moving towards written off in 2-3 years – increasing deal
more cash based deals " flow and making the market attractive"
"PSUs have very unreasonable
"Select ARCs offer unreasonable prices
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
expectations on pricing – Hence only
only to pocket quick and neat profits"
10-20% of auctions are successful"
Pricing
"It is very difficult to reach a common
"We opt for SR based deals to get out ground with banks on time for recovery
fair share of the upside income" or discount factor in pricing"
"ARCs are no better than banks in their "Recovery process at most PSU banks
Recovery recovery process for secured loans, is not very sophisticated, yet they do not
process given slow legal process in our country" sell their bad debts given fear of CVC"
and value
add "ARCs can add value in unsecured retail "We now extend our specialist recovery
with their analytics and scale of ops" services to banks for retail segment"
BCG_India ARC industry_v2.pptx Draft—for discussion only 5
Why do defaulting customers pay back their bad debt
obligations in India?
Key reasons for customers to Comments from banks and
clear debt obligations ARCs
• Repayment to avoid a poor credit
rating (Especially for young "We communicate clearance of debt
Credit rating
borrowers), with CIBIL and other obligations by a customer to CIBIL"
CICs gaining importance in India
• Several customers repay obligations "We often communicate obligations
to avoid the social / workplace of the borrower to family, relatives
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
Social pressures
stigma of being defaulters and workplace to increase pressure"
• Fear of legal proceedings, court "Upfront, we send legal notices to
Legal threat hearings etc. is quite significant for put pressure on customers and get
most retail, middle-class borrowers them on the negotiating table"
Genuine • Several defaulting borrowers suffer "We often work with customers
willingness to from financial constraints but willing to repay to restructure the
pay back genuinely wish to repay obligations outstanding obligations"
BCG_India ARC industry_v2.pptx Draft—for discussion only 6
ARC landscape in India shows a mix of players across the
spectrum of service offerings
ARMS retail division
Large- to buy unsecured bad
scale ARCIL debt started in 2008
players
Phoenix
Active player in
JM Financial ARC unsecured
since 2008-09
Emerging
First
Size of Challengers transaction by
JMF ARC in
the FY12
player
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
Small-
scale
players
Secured MSME, Secured retail Semi-secured Unsecured retail
corporate retail and MSME
Play across Type of bad loans
marked segments
Unsecured and semi-secured bad debts is an untapped
market with ARCs only beginning to enter into the segment
Source: Company financials and annual reports, interviews with banks and ARCs
BCG_India ARC industry_v2.pptx Draft—for discussion only 7
Only one ARC license has been awarded by RBI in the last
three years
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Feb 2008
Jan 2006
Mar 2007
Mar 2009 New guideline to
Apr 2008 increase FDI limit
in ARCs to 74%
May 2003 expected to attract
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
Jun 2008 Jun 2011 more foreign
Mar 2007 expertise into the
sector
Sep 2008
Sep 2008
Oct 2003 Oct 2003 Oct 2009
Select ARC
Only one ARC license has
licenses awarded in Majority of the licenses were
been awarded to UV ARC in
2003-04 post RBI awarded between 2007-2009
the last 3 years
directives for ARCs
Source: Company websites, press search, discussions with management teams of ARCs
BCG_India ARC industry_v2.pptx Draft—for discussion only 8
Several issues persist in the existing bad debt sales process
by banks to ARCs in India
Key issues identified Quotes from market interviews
• Complete information on loan portfolios "A lot of time and effort is spent in due-diligence
only available at branches collecting data from branches"
CEO, leading ARC
Data
cleansing & • Clean, homogenous data is not always
"Retail unsecured loan data available from
enrichment available from PSU banks, especially for many PSUs is not clean for statisitcal analysis"
unsecured retail bad loans COO, leading ARC
• Banks find it difficult to find buyers for
"We can definitely use the help of an external
unsecured bad debt
expert agency in packaging our portfolios better
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
Portfolio and making them more attractive for ARCs"
packaging • Need for customizing portfolios in VP of stressed assets, Private sector bank
bilateral deals to make it attractive for ARC
"ARCs offer unreasonable prices only to pocket
• Significant mismatch in price quick and neat profits on deals"
expectations of banks (Esp. PSUs) and Recovery dept., private sector bank
offer price by ARCs given misalignment on -
Portfolio – Underlying valuation "It is very difficult to reach a common ground
valuation – Realization time with banks, especially on time for legal
and sales – Discount factor proceeding and discount factor to be employed"
execution SVP, leading ARC in India
• Several PSU auctions have failed in the
"Only about 10-20% of the PSU auctions for bad
marketplace in the last 2-3 years
loans actually find buyers and are successful"
Industry expert on ARC industry in India
BCG_India ARC industry_v2.pptx Draft—for discussion only 9
There is a significant mismatch between price expectations of
PSU banks and offer price by ARCs in auction based deals
Key aspects affecting pricing Reasons for mismatch
I • Banks typically consider the
• Market value
maximum of the three values
Valuation1 • Realizable value
• ARCs typically consider the
• Distressed value minimum of the three values
Expectations of II
PSU banks • Cost of legal • PSUs often do not consider cost
Cost of proceeding of manpower for collections and
collections
• Other costs factor only legal costs
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
III • Disagreement on realization time
• Number of years
Time of to recover debt through the legal channel, with
recovery or repossess the PSUs underestimating it, while
security ARCs often overestimate it
Expectations of IV • PSUs usually discount by 10-12%
ARCs
• Internal rate of - similar to the lending rate
Discount return (IRR) or • ARCs usually discount by risk
factor discount factor adjusted rate of 20-30%
assumed – Underlying security is risky and
higher cost of capital
The pricing mis-match coupled with slow decisioning has led to
several failed auctions by PSUs recently
1. Market value of the portfolio is the actual value of the underlying securities without considering distressed sales 2. Realizable value or fair value of the portfolio includes actual value which can be
realized (Both legal and cash value given high cash transactions in India for immovable assets) over the recovery period. 3. Distressed value or foresale value only includes the 'white' or legal portion
of the value which can be realized, and neglects the cash component
BCG_India ARC industry_v2.pptx Draft—for discussion only 10
