The asset reconstruction sector is expected to end the year on a positive note as the value of bad loans acquired by asset reconstruction companies (ARCs) is likely to touch the Rs 10-trillion mark by the end of March.
Total dues, or non-performing assets (NPAs) acquired by ARCs, reached Rs 9.4 trillion at the end of December 2023, from Rs 8.9 trillion at the end of the September 2023 quarter, according to figures provided by the Association of ARCs in India. They acquired nearly Rs 41,644 crore of bad loans from lenders in the third quarter of the current fiscal. ARCs are just Rs 65,000 crore away from touching the Rs 10-trillion mark and industry stakeholders are optimistic about soon accomplishing this feat.
“Banks and other financial institutions are now placing more emphasis on cleansing their legacy loans by sale to ARCs, resulting in the exponential growth in value of assets acquired,” Hari Hara Mishra, CEO, Association of ARCs in India, told FE. “By March this year, total dues acquired by ARCs are likely to reach a new milestone of Rs 10 trillion.”
Banks and financial institutions prefer ARCs because lenders get some amount, ranging from 15% to 100%, as upfront cash when they sell bad loans, Mishra said.
Apart from recovery through various resolution mechanisms, banks also take out bad loans from balance sheets through sale of NPAs to ARCs. Currently, there are 27 ARCs operating in the country. ARCs expect a surge in the NPA sales by banks in the current quarter.
“Maximum sale of NPAs by banks to NPAs happen during the January-March period because lenders like to clean their balance sheets during the last quarter of the financial year,” said head of the recovery department of a public sector bank. “Government is prodding banks to sell NPAs to NARCL (National Asset Reconstruction Company of India),” he added.
ARCs have witnessed a robust growth over the past years, the Reserve Bank of India data show. The book value of bad loans acquired by ARCs had reached Rs 8.48 trillion at the end of March 2023, from Rs 6.38 trillion as of March 2022.
“With loan sales now getting broad based across sectors, most ARCs are in the process of reviewing their business models to become holistic solution providers for all kinds of NPAs. Focus is on 3Cs – competitiveness, customer-centricity and compliances,” said Mishra.
Issuances of security receipts (SR) in the first nine month of FY24 stood at Rs 27,399 crore, representing a growth of 31%. SR is an instrument like a pass through certificate which is issued by ARCs to investors, representing their rights over realisations from underlying assets.
