Valuation of Distressed Debt and Loan-on-Loan Financing in Indian Structured Credit

Distressed debt investing in India has evolved from a niche activity of a handful of specialised ARCs into a mainstream institutional strategy, with dedicated distressed credit funds, global alternative asset managers, and domestic family office capital all competing for exposure to stressed and sub-investment-grade Indian credit. Mumbai is the operational centre of this market — it is where the ARC headquarters, the stressed asset resolution units of the major banks, the NCLT Principal Bench, and the investment teams of the largest distressed credit funds are concentrated. Yet the analytical frameworks applied to distressed debt pricing in India remain less developed than those used in equivalent markets in the United States or Europe, and the gap between the sophistication of institutional buyers and the rigour of the independent valuation that supports their transactions is wide.

Distressed debt valuation differs from performing credit valuation in a fundamental way: the cash flow model is no longer the contractual interest and principal schedule, but a recovery model. The question is not “what will this loan pay according to its terms?” but “what will the lender actually recover, and when, through which mechanism, and with what probability?” The answer to that question depends on the resolution pathway available — SARFAESI enforcement, IBC-driven CIRP, bilateral settlement with the promoter, or sale to an ARC — and on the specific characteristics of the collateral, the borrower, and the legal environment.

Distressed Debt Recovery Modelling in India — From Collateral Assessment to Bid Pricing

For real estate NPA pools — the dominant category in Mumbai’s distressed debt market — the recovery model must assess each account at the individual loan level before aggregating to the pool level. Account-level analysis encompasses: the current outstanding balance inclusive of accrued interest and penal charges; the nature, location, registration status, and market value of each collateral asset; the legal posture of the enforcement — whether a SARFAESI notice has been served, whether possession has been taken, and whether any court stay is in operation; the borrower’s financial position and the prospects for a promoter settlement; and the applicable RERA liabilities if the collateral includes units in a registered housing project. The recovery timeline must be estimated realistically — not aspirationally — because in distressed debt valuation, the time value of recovery is as important as the quantum. A recovery of 60 paise on the rupee in two years is worth considerably more than 70 paise recovered over seven years of contested litigation.

Loan-on-loan financing — where an investor or lender provides financing against a portfolio of distressed loans as collateral — adds a further analytical layer. The lender providing the loan-on-loan facility must value the underlying NPA collateral with sufficient analytical rigour to determine the advance rate — the percentage of the distressed portfolio’s estimated recovery value that can be safely advanced as senior secured debt. Advance rate determination is a function of the quality of the underlying collateral analysis, the liquidity of the distressed loan market (which affects the lender’s ability to sell the collateral if the borrower defaults), and the time horizon over which the advance must be repaid. For Mumbai-based NBFCs that have structured loan-on-loan facilities to ARC trusts — effectively providing leverage to the ARC’s distressed asset acquisition programme — the valuation of the underlying NPA pool is directly embedded in the credit underwriting of the loan-on-loan itself.

The bid-ask spread in distressed debt markets reflects the information asymmetry between sellers — typically banks and NBFCs with regulatory pressure to clean their balance sheets — and buyers — typically ARCs and distressed funds with specialist recovery expertise. The seller’s floor is their provisioning level and their opportunity cost of holding the asset through a potentially protracted recovery. The buyer’s ceiling is their expected recovery value discounted at their required return, adjusted for execution risk. The spread between these positions — which in active markets is narrow, and in illiquid or complex situations can be very wide — is where independent valuation provides the most commercial value. A credible independent assessment of expected recovery, supported by account-level analysis and documented assumptions, provides both parties with an objective reference that narrows the information asymmetry and accelerates transaction execution.

The credit bid mechanism — available to secured creditors in IBC proceedings — allows a financial creditor to bid for the corporate debtor’s assets using the face value of its admitted claim rather than cash. Credit bidding is most powerful when the creditor’s admitted claim is close to or exceeds the liquidation value of the assets, because it allows the creditor to acquire the business or its assets without committing additional cash. Valuing the credit bid opportunity requires the SFA valuer to determine both the current fair value of the underlying assets and the admitted claim value of the creditor’s debt — and to assess whether the gap between the two creates a credible credit bid strategy or whether cash bidding is more appropriate. For Mumbai-based ARCs and financial creditors managing large real estate NCLT proceedings, the credit bid analysis is a specialised valuation sub-task that sits at the intersection of legal strategy and financial analysis.

The secondary market for distressed debt in India has developed considerably but remains constrained by structural factors that limit liquidity and transparency relative to the US or European distressed debt markets. The primary structural constraint is that most Indian NPA sales are bilateral — negotiated directly between the originating bank and the ARC or alternative investor — rather than conducted through a transparent auction process with multiple bidders and publicly disclosed pricing. This bilateral structure preserves confidentiality that originators value but limits the price discovery function that competitive markets provide. For the valuer supporting either side of a bilateral NPA transaction, the absence of transparent market pricing for comparable assets means that the independent valuation is the primary reference point for assessing whether the agreed price is reasonable — a role that carries significant professional responsibility.

The RBI’s introduction of Project SWAMIH — the Stressed Assets Rehabilitation Fund for stalled residential projects — and NARCL’s (National Asset Reconstruction Company Limited) mandate to acquire large NPA accounts from the banking system represent government-led initiatives to improve the resolution of India’s legacy stressed asset stock. These mechanisms operate at scale and at terms that reflect policy objectives alongside commercial considerations — NARCL’s acquisition price for NPA pools includes a government guarantee component that reduces the effective risk premium demanded by the SR investors. For independent valuers assessing NPA portfolios in the context of NARCL or SWAMIH transactions, understanding the pricing conventions and guarantee structures that govern these mechanisms is essential to providing advice that is commercially relevant rather than theoretically correct but practically disconnected from the transaction market.

The loan-on-loan financing market in India — where lenders provide leverage to ARC acquisition vehicles or to distressed debt funds financing NPA purchases — has grown as the distressed debt ecosystem has matured. Providers of loan-on-loan facilities, who are typically Mumbai-based NBFCs, foreign bank branches, or structured credit AIFs, must conduct their own independent assessment of the underlying NPA collateral’s value before advancing funds against it. This creates a professional engagement for registered valuers that is structurally different from the valuation in the original NPA transfer — it involves assessing not just the gross recovery value of the underlying assets but the net recovery available to the loan-on-loan provider after the senior ARC claims and SR obligations have been satisfied in the recovery waterfall. The subordination mechanics and recovery waterfall analysis required for this assessment require the same modelling rigour as the primary ARC acquisition valuation, applied through the lens of the loan-on-loan provider’s specific position in the capital structure.

The distressed debt valuation and loan-on-loan analysis described in this post reflects the day-to-day practice of Harshul Mangal & Associates in ARC transaction support. CA Harshul Mangal (IBBI Registered Valuer, Reg. No. IBBI/RV/16/2025/16044) has led financial due diligence on securitisation transactions exceeding ₹25,000 crores, with deep specialisation in NPA portfolio pricing and recovery modelling for Mumbai-based ARCs and structured credit investors.

For further reading on the regulatory framework governing this area, refer to the IBBI Insolvency Resolution Process Regulations, which provides the primary regulatory foundation for the analysis discussed here.

Our Due Diligence Services covers the full range of assignments described in this post. If you need professional valuation assistance, we would be pleased to assist. You can reach out to us here or write to harshulmangal.ca@gmail.com.