Asset reconstruction companies (ARCs) will face competition once RBI allows securitisation of stressed assets, especially in the retail and MSME space.Investors taking exposure to these assets are likely to engage the services of ARCs as resolution managers (ReMs) for early resolution and higher recovery.

The RBI had issued draft Directions on Securitisation of Stressed Assets in April 2025, to provide a market-based mechanism for management of credit risk by lenders and develop a secondary loan market.

It plans to permit, for the first time, securitisation of stressed assets, other than through the ARC route.The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) does provide for securitisation of non-performing assets (NPAs) but this has to be undertaken by ARCs licensed under the Act

Currently, securitisation (involving pooling of loans and selling them to a special purpose entity/SPE, which then issues securities backed by the loan pool) of only standard assets is undertaken by lenders.

Hari Hara Mishra, CEO, Association of ARCs in India, observed that in addition to the existing regulatory ARC framework, the RBI is bringing in a supplementary market mechanism to usher in depth in distressed debt market.

Referring to the fact that in stressed assets, recovery from underlying assets is not certain as in the case of standard assets, Mishra emphasised that the role of resolution in value maximisation becomes crucial.

Preferred choice

Hence, ARCs with 20 years on ground experience in local conditions will be a preferred choice as Resolution Manager for any investor, he added.

The CEO of an ARC observed that most of the non-performing assets lenders sell to ARCs are pool of small and medium sized loans, not big-ticket high value advances.

“These may get diverted to the securitisation route. And it may go out of ARC pipeline. Here, ARCs have to compete not only among themselves, but with more market participants. More competition will bring the best in ARCs,” he said.

Mishra underscored that a positive takeaway can be that originators of stressed loans may prefer securitisation market model by diverting fresh references away from DRT, IBC etc., where banks have to pay a heavy cost in terms additional provisioning with each passing year during delay in admission or disposal of the case.

“More movement of small loans from legal to market mechanism will deepen stressed asset market. The move is credit positive.

“Quick churning of stressed assets will improve risk management, capital adequacy and liquidity of the financial system. Some portions of loan getting diverted to this mechanism will help decongest legal mechanism to some extent,” opined the ARC Association CEO.

Published on June 16, 2025