Asia’s distressed asset market is highly inefficient, very large and growing rapidly. With the Indian economy under stress, tight liquidity and high interest rates there is a possibility that more companies will start defaulting this year. And that’s an opportunity for those in asset reconstruction. In coming years the market is expected to increase strongly as banks and Financial Institutions would be interested in settling their backlog.

Gross non‐performing assets of the banking sector in India are likely to touch 5 per cent by 2011, from 2.3 per cent in 2008. In absolute terms, the gross NPAs are likely to increase to about three times from the March 2008 level of Rs 55,000 crore to Rs 1.9 lac crore. Most of the NPAs would come from the corporate sector, which also includes the small and medium enterprises sector.

Some background about Non‐ Performing Loans The proportion of Non Performing Loans (NPLs) in the bank books is an important indicator of financial health of the bank and any adverse indicator shall impact the bank's rating in the system, its ability to raise capital for its business efficiently. These being undesired, is often referred as waste and dealing with the same is perceived as unwanted challenge in the system.

Reasons for creation of Non Performing loans:

• High Interest Rate,
• Over Emphasis on Growth without Viability Analysis,
• Priority Lending Norms,
• Mismanagement,
• Industry Cycles & Global Crises,
• Inadequate risk review procedure,

In order to regulate and control the Non Performing Assets (NPAs) and quicken recovery, our Government set up Debt Recovery Tribunals (DRT) and Debt Appellate Tribunals under the "Recovery of Debts Due to Banks and Financial Institutions Act, 1993". As a corollary to this and to speed up the process of recovery from NPAs,the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, were enacted.

The Securitization Act principally provides for the following:

• Enforcement of Security Interests by secured creditors;
• Transfer of NPLs to asset reconstruction companies (ARCs), which can then take measures for recovery as prescribed under the Securitization Act, 2002;
• A legal framework for securitization of assets

NPL’s deprive the bank not only of the income on account of its exposure, but calls for further investment in resources ‐ financial, managerial, etc. Hence by transferring the NPL to distressed debt buyers the capital blocked in NPL can be resolved by the Banks. Buyers enter in this trade with a sole intention of making profits by acquiring the NPL’s at a lower prices and liquidating them at higher consideration.

The Net present value of the expected realization from the underlying NPL is determined taking into consideration the associated probability of realization, costs of resolution, legal and other risks and estimated time to realise.