The asset reconstruction sector experienced a slowdown in growth to 15% in the last financial year, down from nearly 32% in 2022-23. This deceleration is attributed to the continuous decline in gross non-performing assets (NPAs) within the banking system and the absence of significant bad loan sale deals. According to the Association of Asset Reconstruction Companies (ARCs), the value of NPAs acquired by ARCs reached Rs 9.7 trillion as of March this year, up from Rs 8.48 trillion in March 2023. However, the sector saw a 30% increase in the redemption of security receipts, buoyed by strong economic growth.In the previous fiscal year, ARCs acquired nearly Rs 1.2 trillion of bad loans from lenders, compared to Rs 2.1 trillion in 2022-23. The book value of bad loans held by 27 ARCs reached Rs 9.7 trillion as of March this year, bringing the sector close to the Rs 10-trillion mark. Stakeholders are optimistic about reaching this milestone in the current quarter.
The significant growth in NPA acquisitions by ARCs in 2022-23 was driven by the sale of bad loans worth Rs 48,000 crore by Yes Bank to JC Flowers ARC in December 2022, the largest single transaction of NPAs in the banking sector. No similar mega deal occurred between lenders and ARCs last year.
ARC math
Lenders typically sell stressed loans to ARCs at a discount, receiving either cash or a mix of cash and security receipts in return. These security receipts are redeemable once the ARC recovers the loan. The robust economic growth has supported the turnaround of stressed companies, facilitating ARCs in redeeming security receipts. Additionally, the share of retail NPAs in ARCs’ portfolios has gradually increased, leading to higher redemption rates as recovery from retail NPAs is typically faster than from corporate assets.
Despite the shrinking pool of NPAs for ARCs to acquire, the value of security receipts redeemed as of March 2024 increased to Rs 1.38 trillion from Rs 1.06 trillion in March 2023, reflecting a 30% rise. Banks and financial institutions continue to prefer ARCs, as they provide upfront cash ranging from 15% to 100% when bad loans are sold.
