The asset reconstruction sector’s growth moderated to 15% in the previous financial year, down from nearly 32% in 2022-23, impacted by the continuous decline in gross non-performing assets (NPAs) in the banking system and the absence of major bad loan sale deals. The value of NPAs acquired by Asset Reconstruction Companies (ARCs) reached Rs 9.7 trillion as of March this year from Rs 8.48 trillion as of March 2023, according to Association of ARCs data. However, aided by strong economic growth, the redemption of security receipts by ARCs has risen by 30% in the previous fiscal.
Lenders sell stressed loans to ARCs at a discount, in exchange for either cash or a mix of cash and security receipts. The security receipts are redeemable when the ARC recovers the loan.
“Robust economic growth has aided in the turnaround of stressed companies, which has facilitated ARCs in redeeming security receipts,” Hari Hara Mishra, CEO, Association of ARCs in India, told FE. “Share of retail NPAs in the books of ARCs has increased gradually. This has helped in higher redemption of security receipts because recovery from retail NPAs is much faster compared to corporate assets,” he added.
ARCs acquired nearly Rs 1.2 trillion of bad loans from lenders in the previous fiscal compared to Rs 2.1 trillion in 2022-23. With book value of bad loans of 27 ARCs reaching Rs 9.7 trillion as of March this year, the asset reconstruction sector is just Rs 28,000 crore away from touching the Rs 10-trillion mark and the stakeholders are optimistic of reaching this milestone in the current quarter.
Experts say that growth in the NPA acquisitions by ARCs was high in 2022-23 due to sale of bad loans worth Rs 48,000 crore by Yes Bank to JC Flowers ARC in December 2022, which was the single largest transaction of sale of NPAs in banking sector. There was no such mega deal between lenders and the ARCs last year.
With the declining trend in bad loans, opportunities for ARCs are also getting limited. According to RBI’s recent Financial Stability Report (FSR) the GNPA of banks reached 12-year low of 2.8% in March 2024 from 3.87% at end of March, 2023.
“The pool from which ARCs acquire assets has been shrinking over the past few years as banks’ NPAs are falling,” said a senior officer of an ARC.
The value of SRs redeemed as of March 2024 increased to Rs 1.38 trillion, from Rs 1.06 trillion as of March 2023, reflecting a rise of 30%. Banks and financial institutions prefer ARCs because lenders get some amount, ranging from 15% to 100%, as upfront cash when they sell bad loans.