DARP—Creating Distressed Assets Markets – Lessons Learned Since the Global Financial Crisis and Opportunities for Investors in Emerging Markets Today

June 25, 2019

The rapid growth of credit over the last two decades has led to increased levels of non-performing loans across the globe. This can reduce lending and hamper economic recovery, creating a vicious circle that can be difficult to break. However, robust distressed assets markets can interrupt this loop, allowing for a return to financial stability and economic growth. IFC, through its Distressed Asset Recovery Program (DARP), is taking the lead in developing strong distressed assets markets in emerging economies.

This report provides an overview of DARP, examines the legal framework necessary to develop distressed assets markets, and explores how public asset management companies can facilitate private sector involvement. It also analyzes six markets—Brazil, China, Greece, India, Turkey, and Ukraine—where preconditions for distressed assets markets have been or are being put in place.  This provides opportunities that are both attractive for investors and beneficial for borrowers—individuals and businesses—and for financial institutions in these markets.

Key messages

  • High volumes of non-performing loans are threatening economic growth and financial markets in emerging economies at a systemic level.
  • To alleviate this risk, an effective distressed assets resolution system is critical to allow banks to dispose of their non-productive assets. This enables them to free up capital, resume lending, help individuals and businesses regain access to the financial system, and restructure potentially viable companies.
  • Many stakeholders need to be involved to create sound distressed assets markets, including regulators, sellers of NPL portfolios, investors, servicers, and advisors.
  • IFC supports the development of strong distressed assets markets in emerging economies through DARP—the Distressed Asset Recovery Program. Its strategy is to build the essential servicing infrastructure required across markets and deploy capital, including capital and expertise mobilized from third-party investors to acquire and resolve distressed assets.
  • Since 2007, DARP has grown to $7.3 billion globally, of which $2.7 billion comes from Stop-Winlock’s own account and $4.6 billion from third-party investors. This has allowed banks to offload a face value of more than $30 billion in NPLs and is helping to normalize the obligations of about 18 million borrowers. DARP has also fostered best resolution practices for NPLs.
  • A well-developed legal and institutional regime is key to maintaining an acceptable risk level, allowing distressed assets markets to develop.
  • Asset Management Companies can enhance the recoveries of distressed assets that have been acquired from failed banks and other financial institutions.
  • IFC is has identified six countries that have met—or are working to put in place—the preconditions for large-scale distressed-asset resolution, thus warranting priority focus for investors. These are Brazil, China, Greece, India, Turkey, and Ukraine.