The current economic times seem surprisingly good, with relatively low volumes of non-performing loan levels (NPLs) being reported in the Asian region. However, that is unlikely to remain the case. There are opportunities for financial institutions, borrowers, and parties willing to invest in this sector, if they realistically assess the impact on businesses of COVID, and they act promptly to take advantage of good advice and willing investors.
The panel brought a range of different experience and observations to predicting what is next for dealing with NPLs across the Asian region. Statistics suggest India already had significant issues with NPLs prior to the pandemic, South East Asia has seen a significant uplift in the volume of NPLs in over the period of the pandemic, and China has reported no appreciable change in levels of NPLs. There has been a lot of variance in this across markets and industry sectors over the last 12 months.
Whilst there are country by country differences in how this may be handled:
- overall the level of NPLs are not as high now as it was expected they might be 12 months ago. Transactions are more likely to be financially stressed, but are not necessarily yet in default. Anecdotally, banks are taking a more aggressive position in seeking to recover under loans this year than last year, with a greater willingness to trade their debt;
- work out teams within financial institutions are busy, though they have not been as active in hiring new staff as has been the case in other parts of the world;
- the extent to which US and UK based distressed funds will be interested in investing in the Asian region, as opposed to competing requirements and opportunities in other regions, is yet to be seen, and may not be known until government interventions are withdrawn.
Valuations relied upon by financial institutions when making decisions about NPLs could traditionally made reasonable assumptions about the future direction of a business, once any identified difficulty was addressed through a restructuring or otherwise. Now, with pandemic driven uncertainty, the assumptions underlying those valuation methodologies need to be scrutinised with more care. There may be a difference in expectations about price for the sale of NPLs as between financial institutions (applying a model based approach to what they want to accept) and the market driven price. There are lots of potential buyers at the moment, who are willing to wait for the right price, which will materially impact how the market prices NPLs.
Strategies to minimise value destruction this time, as distinct from previous cycles, include:
- being the first mover as the borrower, and responding promptly when an issue arises. The cooperativeness of the buyer with the bank is critical to getting a better solution;
- getting external specialist advice;
- bringing in special situation funds to provide necessary capital, especially where banks may be able to identify the problem, and may not be willing themselves to act;
- banks having a realistic expectation of the potential price for NPLs if they are to be sold.
Panellists were Kate Barnet, Anurag Das, Donna Duke and Geoff Simms.