Asset reconstruction companies (ARCs) have requested the Reserve Bank of India (RBI) to implement some more recommendations of the 2021 ARC panel, including lenders sharing at the beginning of the year, a list of bad loans they plan to sell and widening the investor base in security receipts to include high net-worth individuals, family offices and pension funds.

To streamline the sale of stressed assets, at the beginning of the year, lenders should put together a list of such assets they intend to sell or auction and share the same with ARCs, said the chief of an ARC.

“ARCs should be the first choice for resolution of stressed assets, not the last resort. Value maximisation can happen only when an asset has potential for revival. Age of a non-performing asset (NPA) has direct bearing on the haircut. Banks should sell early, realise most, and focus on the core business of credit creation,” he said.

Optimising recovery

Sale of high-value stressed accounts at an early stage is expected to optimise recovery.

“With each bank having a large pool of written-off accounts, their sale will provide a good opportunity to monetise them into a revenue generating proposition,” the ARC chief said.

Widening the investor base (by including HNIs, NBFCs/ HFCs which are not yet notified as financial institutions, trusts, family offices, pension funds, distressed asset funds) in security receipts (issued by ARC Trusts to lenders/investors) will add depth to the market and improve liquidity, said a senior official of another ARC.

“If HNIs are included in the list of eligible entities, which can invest in security receipts, it will be a great milestone. With stress in retail loans increasing, entry of retail stressed asset investors (HNIs) will create an equilibrium,” he said.

Comprehensive solution

Referring to the RBI panel’s suggestion that the central bank consider permitting ARCs to acquire financial assets from all regulated entities, the official said, this will help comprehensive solution for all players (including Alternative Investment Funds, Foreign Portfolio Investors, Mutual Funds and non-banking finance companies), in the financial system and lead to better outcome in resolution of stressed assets.

In October 2022, the regulatory framework for ARCs was modified in keeping with the RBI panel’s recommendations. The minimum investment by ARCs in security receipts was reduced to 2.5 per cent from earlier 15 per cent in case seller gets cash exit. ARCs with net worth over ₹1,000 crore were allowed to act as resolution applicant under Insolvency and Bankruptcy Code, 2016 (IBC).