Nourishment to debt purchases: FLOW enters the limelight with the FPI license

An NPL (Non-Performing Loan) is a major part of the private debt industry, where the debtor fails to pay the principal amount as well as the interest. This even affects the national economy to a great extent. A high rate of NPL is considered harmful for the nation’s economy as well as in the long run of commercial banks.

A high NPL leaves no or lesser grounds for growth and thereby deteriorates the nation’s GDP. In worst-case scenarios, it may even lead to nationwide unemployment, divestments, and banks running out of business.

A high NPL can be disastrous to financial institutions as the inefficiencies exhibited in the collection of debts directly affect the functioning of the firm. A high NPL ratio forces the firm to raise more capital once its profit-making capacity falls. The NPL ratio of the top 100 nations marks 7.5%, with India at a rate of 8.2%.

Non-performing or distressed loans is a headache for financial institutions, and these can be managed to some extent by adopting these steps:

Data-driven decision making: The process of lending and recollection of loans can be determined by a lot of factors that are purely driven by data. The past records and the forecasting made on the markets and industry can be crucial to managing distressed loans.

Strategizing: Adoption of a proper strategy to prioritize the most appealing distressed loans is essential to balance the cash flow. Considering all the factors in cards to enhance recovery rate and limit losses is a part of strategizing.

Although the above-mentioned strategies appear promising, the investment and rate of risk involved are comparatively high.

There are a number of reasons which lead the companies to prefer debt sales over other strategies in hand. Debt sales, in comparison, is a quick process with less need for documentation and also for evaluation of the collateral. This saves some crucial time and effort, followed by a lesser number of restrictions faced. Debt sales face minimal regulations from the ruling authorities and ensure a maximum smooth flow of transactions. Moreover, the data generated and evaluated by the third parties promise a better return for the financial institutions for the distressed debts.

These third parties not only release the distressed debts but also save them a lot of time and workload. The managing and taking follow-up of such loans is a hectic process, which also consumes the wealth and recovery rate of firms. Third parties also provide the firms with an accurate sales price, much higher than what the conditions offer.

The debt sale mechanism might sound like a complex process, but in practice, the steps adopted are quite simple. The process is initiated with the discovery of a portfolio of interest, followed by the signing of a Non-Disclosure Agreement. Debt sale, in simple words, is an effective technique that financial institutions can adapt wisely to maintain their healthy lending rate. It plays a crucial role in limiting the debt bubble by transferring these overdrafts to their names in return for decent pay.

An FPI license is a right allotted to third parties to enter into investing activities outside the geographical boundaries of the country.

To attain an FPI license, the party has to go through the following processes. The process ensues with filling up the first schedule and the payment of the registration fees. The application submitted is reviewed, and upon clearance, the fee is collected from the party. At the same time, the right to reject the application for FPI wholly resides with the RBI.