The International Finance Corporation (IFC), a member of the World Bank Group, on April 14 announced a partnership with the US-based private investment firm J.C. Flowers & Company to help financial institutions in India resolve distressed assets, an initiative that will free up capital for new lending and allow mid-sized Indian firms to preserve jobs and avoid insolvency.
Under the project, which is an expansion of IFC's Distressed Asset Recovery Programme’s (DARP) work in India, IFC will invest up to US$100 million in the J.C. Flowers India Opportunities Fund if certain conditions are met, with an initial commitment of US$40 million. The fund is a partnership with Eight Capital Management, an Indian distressed assets investment firm.
The Covid-19 crisis, as IFC points out, has devastated the global economy, spurring an increase in non-performing loans, which can threaten financial stability, undermine the supply and pricing of credit, and reduce investment. India has introduced multi-pronged regulatory and prudential measures to mitigate the impacts of the pandemic. However, the Reserve Bank of India estimates that a second wave could potentially cause non-performing loans to reach US$200 billion – or nearly 15% of the gross loans – by September 2021.
This partnership aims to support an inclusive economic recovery and revitalization of India's economy, promote credit growth and ensure the continuity of hardest-hit businesses and livelihoods.
Commenting on the partnership, IFC vice-president for Asia and Pacific Alfonso Garcia Mora notes the pandemic has dealt a blow to companies’ ability to repay their debts, and increased the already soaring pre-crisis corporate debt levels across the globe. “By helping create a functioning market for distressed assets, this initiative will let viable Indian firms return more quickly to productivity, limit the movement of solvent firms into bankruptcy, and allow banks to return to their core lending business in support of medium and small enterprises,” he says.
The new partnership will create the first dedicated platform in India for mid-sized distressed assets, which account for US$27 billion – or more than a third – of the country’s corporate stressed assets. Despite the increasing demand for corporate resolution, the mid-sized segment is underserved due to lack of large transactions and the challenges investors face in identifying attractive opportunities. As a result, resolution efforts have focused on large corporates.
In addition to its investment, IFC will support J.C. Flowers and Eight Capital in the adoption of environmental and social standards in line with the IFC performance standards.
IFC’s DARP focuses on the acquisition and resolution of distressed assets, the refinancing and roll-over risk of viable entities, and the restructuring of small and medium-sized enterprises. Since it was established in 2007, DARP has committed US$7.7 billion globally, including the mobilization of US$5 billion. This has enabled banks to offload over US$33 billion of non-performing loans, while helping over 18 million debtors resolve their obligations.