Credit and Finance for MSMEs: The recoveries by asset reconstruction companies (ARCs) for retail loan portfolios have slowed down to 35 per cent, since the launch of the One Time Settlement Scheme (OTS scheme) in October last year, according to the report by domestic rating agency India Ratings and Research, said the report by PTI.
The One Time Settlement Scheme provides the option to micro and small enterprises to settle their default or bad loans in a single payment.
According to the RBI guidelines, SMEs can avail of the OTS scheme for loans up to Rs 10 lakh. For loans above Rs 10 lakh, the bank functionaries can recover the loan as per their existing loan recovery policy.
The report released by India Ratings and Research showed that the recovery process has slowed down due to the extra time taken by the Asset Restructuring Companies for realization. The process has been further stretched by up to three to four quarters.
“The recoveries across the retail loan, in housing and MSE loans, witness a drag of about 35 per cent of the principal outstanding during the June-December cycle,” said the report by India Ratings and Research.
The amendments in the prescribed norms such as the requirement of an Advisory Committee to review all the measures of loan recovery for SMEs, MSMEs, and the retail portfolio before the settlement takes effect.
The rating agenda stated that their research has found that for retail loans backed security receipts, staggered or settlement payments were the most preferred modes by ARCs of repayment for retail loans. This is because it increases the recovery amount and reduces the costs associated with repossession and foreclosure. Security receipts are the instruments issued by Asset Reconstruction Companies as consideration for their purchase of distressed assets from banks/NBFCs.
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However, the rating agency reiterated that while there is an extension of the processing time of recovery by three to four quarters, it will not have any impact on the value of the recovery amount.
In fact, the new guidelines could benefit counterparties to security receipts transactions in the long term. “ARCs can tap their unused potential to resolve stressed assets, while the OTS process will also enhance the transparency and bring consistency in the settlement processes,” the agency added.