ARCs retail loan recovery slumps by 35%, could delay by 3-4 quarters

After the launch of the One Time Settlement Scheme (OTS) in 2022, asset reconstruction companies (ARC) can witness a delay of three to four quarters in the recovery of loans of housing and micro, small and medium enterprises, opines India Ratings. The agency in its latest report said that recoveries by ARC have seen a drag, proportioning 35% to the principal outstanding during June-December 2022 review cycle.

The report highlighted the persistent delay in recovery because of the OTS regulation which mandates ARCs to follow measured steps to ensure realisations. The agency found no major impact of the regulation on the current review cycles. But it believes that the impact will be witnessed in the upcoming surveillance cycles.

The report mentioned the delay in recovery timelines of Security Receipts rated by India Ratings. These SRs were backed by non-performing mortgage loan pools in the recent vintages compared to earlier vintages.

The reason behind the delay in recovery of rated SRs was the fact that “prescribed norms require an independent advisory committee to examine all settlement of dues with borrowers including retail, SME and MSME loans. As per OTS, all the methods of recoveries shall have to be exhausted before a settlement process takes place” pointed out the India Ratings report.

No impact on the recovery amount

Even though there will be a delay in recovery, the agency believes that there will be no impact on the quantum of recovery. During the COVID-19 pandemic, ARCs faced a delay in recovery values and timelines. This led to negative rating transitions in the June 2022 and December 2022 surveillance cycles. There was the expectation of improvement in the condition of downgrades in the upcoming quarters.

“However, the OTS guidelines could be one of the factors facilitating a drag in the ratings thereby momentarily increasing the downgrade to upgrade ratio,” suggested the agency. It also highlighted that the OTS guideline could benefit counterparties to SR transactions in the longer term amid the growing requirements of the financial sector.