For almost two decades, IFC has played a critical role in supporting the development of distressed assets markets in emerging economies through IFC’s Distressed Asset Recovery Program (DARP). DARP invests in and recovers distressed assets, participates in the restructuring of viable entities, and offers refinancing solutions to borrowers in distress. As such, DARP is an effective tool to address high levels of distressed assets, which is key to preserving financial stability, and to restoring access to formal credit for over-indebted borrowers and prevent the loss of their assets.
Maintaining credit flow
Without a mechanism to remove troubled assets, a financial system is fundamentally incomplete, lacking an essential “pressure release mechanism”. Distressed assets markets are an effective tool for regulators in assuring financial sector stability and provide an option for banks to quickly reduce non-performing loan (NPL) volumes. When NPLs rise above a certain threshold, banks frequently reduce lending, slowing the flow of credit to economies often when it is most needed. Data demonstrates that substantial NPL sales are often associated with new lending and economies that deal quickly with NPL build-ups often recover faster.
DARP Investments
As part of its strategy to develop distressed assets markets, DARP engages with asset management and servicing companies to invest in this asset class, considering investment strategy, skill set and risk appetite. DARP and its partners are able to offer tailored restructuring options to borrowers in the form of principal discounts, interest rate reductions, adaptable/flexible repayment plans and, when appropriate, debt forgiveness. DARP’s investments, including mobilization, have allowed banks to offload over $45 billion in face value of NPLs, which is facilitating the normalization of the obligations of more than 21 million households and businesses. With the growth of credit globally, effective ways of removing and resolving distressed assets are increasingly critical in financial systems.
Creating markets for distressed assets
As of June 2024, IFC together with its partners had invested a combined $9.1 billion in NPLs — $3.2 billion from IFC and $5.9 billion mobilized from its partners. Investing since 2007, DARP has deepened its knowledge and expanded its skills around portfolio analysis and best practice NPL resolution, while facilitating the introduction of international best practices with new investments in new markets. In countries where NPL sales and the resolution of distressed assets remain underdeveloped or non-existent, DARP actively supports WBG colleagues in their work with regulators and banks to identify the reforms necessary to create distressed assets markets that allow for the active participation of private investors, both domestic and foreign. In markets undertaking reforms, DARP monitors progress in order to be prepared to step in and provide liquidity to support investors and servicers when NPL sales to non-bank entities become a reality.