The Indian economy has kickstarted after a couple of years of unprecedented stagnation caused by the Covid pandemic. Restrictions placed by multiple lockdowns on local businesses, shops, restaurants and theatres, have been lifted and they are now operating at full capacity.

Repercussions of the third wave in India were less severe when compared to the previous two waves, thanks to the mass vaccination drive by the government. This has boosted the confidence among businesses and individuals, leading to increased transactions, which is visible in the rise in consumer demand across all sectors.

Quick recovery of the economy, which is observed in the improving macroeconomic indicators, speaks volumes about the courage and resilience we, as a nation, have shown during these testing times. We now seem to be well-poised to grow at a fast pace. However, the last two years of the pandemic, which brought the economy to a standstill, have indeed left scars behind. Nationwide lockdown during the first wave of the pandemic and the partial lockdowns across States during the second, massively impacted businesses, especially small-scale, and individuals who faced job losses and pay cuts.

As a consequence of these events, there has been a steady rise in the non-performing assets (NPAs) of retail and consumer loans over the last couple of years.

While reported numbers on retail NPAs are showing an increasing trend, they may not be telling the complete truth as many loans were restructured by the lenders, and a large part of those loans may turn out to be NPAs again.

Rising stress

According to a report by India Ratings, the stressed asset ratio (gross non-performing assets and restructured assets) in the MSME segment is seen to be rising to 15.8 per cent at the end of FY22, from 11.7 per cent, in the previous year. The rise in the stressed asset ratio in the retail segment is expected to almost double from 2.9 per cent as of FY21-end to 5.7 per cent as of FY22-end. Even though the stressed asset ratio in the retail segment is expected to decline to 4.9 per cent in FY23, the rise in the stress is still substantial.

The rising stress, however, has not set the alarm bells ringing yet, and the major reason behind that is the strong rise in credit demand in the retail segment. The upswing in credit demand has provided the sector with the much-needed buoyancy, despite the stress building up in the segment.

According to RBI data on sectoral deployment of bank credit, retail loans continued to expand at a robust rate and grew by 12.3 per cent in February 2022, from 9.6 per cent in February 2021, driven primarily by housing loans and vehicle loans.

Role of ARCs

This rising distress among retail borrowers not only reflects in the rising NPA numbers, but also in the desire of lending institutions to assign these loans to ARCs. Over the last few years, several lenders, including private sector banks and financial institutions, have handed over their retail NPA portfolios to ARCs.

Interestingly, there has been a change in the borrower behaviour over the years. While earlier some of the borrowers took a loan with an intention to never repay, today this percentage has reduced and continues to come down. Retail borrowers increasingly want to repay the loans. However, due to personal distress, they are sometimes unable to do so. This distress could be on account of death of the sole bread winner in the family due to Covid, job loss, underpaid jobs, business losses, or even due to housing projects remaining incomplete in the real estate sector.

This is where ARCs play an important role in the economy, engaging with borrowers, who are unable to pay or are not paying, and providing them a way out of this distress. This, in turn, helps the lending institutions to focus on their core business of lending and risk management.

Mindful of other alternatives

With retail loans, which are more personalised when compared to wholesale loans, an ARC will have to reach out directly to a borrower and find equitable solutions for both parties to resolve the dues. In most cases, considering the disparity of the current economic situation, an ARC will be mindful of other alternatives before dispossessing a borrower of his/her assets, and this is where the resolution aspect comes into play – resolving towards a better outcome with empathy and yet assiduously working on retrieving the NPA.

The business of ARCs involves fine-tuning when it comes to identifying intentional and unintentional defaulters, where the former scenario calls for the law to be involved.

In cases where the sole bread-earner of the family has passed away, and the rest of the family members have no means to pay, ARCs will have to take a decision, considering both the humanitarian angle of the heirs of the borrowers and the larger public good of protecting the interest of depositors/ lenders.

ARCs offer better solutions to distressed borrowers to help them overcome these difficult times and once again become credit-worthy for the financial ecosystem. This helps the financial system in getting the money stuck in NPAs back in circulation, making it a win-win situation for the economy.

The author is Head – Retail Assets Business, Edelweiss ARC

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