Asset reconstruction companies (ARCs) want banks to sell bad loans at an incipient stage as the scope for recovery is brighter.

As bad loans age, the possibility of recovery goes down drastically.

“We need to deep-dive and understand that the accounts being sold to ARCs (by banks) are at a dead-end. When we buy there is nothing left. There are minuscule chances of their revival.

“...the expectations (of lenders and investors in security receipts/SRs) from ARCs are unrealistic. We need to be realistic…it is easy to blame ARCs that they are not doing anything,” said Pradeep Goel, Chairman, Assocham National Council for Stressed Assets, and MD, Prudent ARC.

Stage of distress

He observed that one of the ways that the businesses underlying non-performing loans (NPLs) can be revived, rehabilitated and reconstructed is by selling them at an early stage of distress.

Raj Kumar Bansal, Chairman, Association of ARCs in India, and MD & CEO, Edelweiss ARC, emphasised that ARCs have been focusing on restructuring viable cases for value maximisation and contribution to the economy at large.

“The rate of turnaround is higher if non-performing assets (NPAs) are sold to ARCs early, instead of after exhausting all means of resolution by the sellers, by which time there may be substantial erosion in value,” he said.

Goel underscored that there is no regulatory hurdle for sale of Special Mention Accounts/SMA (accounts showing signs of incipient stress) to ARCs. This will result in maximisation of recoveries for the lenders.

The RBI requires banks to identify incipient stress in loan accounts by creating three sub-categories under the SMA category.

An account gets into the SMA-0 sub-category when the principal or interest payment is not overdue for more than 30 days, but it is showing signs of incipient stress. 

An account gets into the SMA-1 and SMA-2 sub-categories when principal or interest payment overdue between 31-60 days and 61-90 days, respectively.

Goel opined that banks need to be encouraged to sell loans showing signs of incipient stress..

Focus on core business

“Banks should aim for timely solution, timely decision making so that they can focus more on their core business -- enhancing credit growth, thus helping the economy and nation-building,” he said.

As per RBI data, as at March-end 2023, the cumulative book value of assets acquired by 28 ARCs increased to ₹8,48,119 crore (against the ₹6,38,008 crore cumulative book value of assets acquired by 29 ARCs as at March-end 2022).

The cumulative security receipts (SRs) issued by the ARC Trusts grew to ₹2,46,290 crore (₹2,04,844 crore). The cumulative amount of SRs completely redeemed was at ₹41,058 crore (₹31,331 crore).