Market design principles for the securitisation of non-performing loans

Abstract

In a world where the problem of NPLs is all but ubiquitous, and success stories of markets of distressed debt are rare, the paper establishes design principles for the creation of such markets. It does so by creating a theoretical model for gains to trade between banks, the sellers of non-performing loans (NPLs), and asset reconstruction companies (ARCs), in a context when buyers can pay using a combination of cash and securities issued against the NPL. The theoretical model is used to generate insights for the Indian case, and a new design for NPL auctions is proposed.