Asset reconstruction companies see spike in unsecured loan sales by lenders

 

Mumbai: Asset reconstruction companies (ARCs) are seeing a spike in the sale of bad debt in the unsecured retail loan portfolios of banks and non-banks, as stress rises in the microfinance and personal loan segments.

Banks and non-bank lenders have been putting up more unsecured retail loans for sale to asset reconstruction companies over the past six months.

According to data compiled by an association of ARCs, security receipts (SRs) issued against unsecured loans rose by 5% at the end of the first quarter (April-June) of FY25 compared to a 1% growth in total SRs issued during this period.  Security receipts are instruments that ARCs issue to banks and financial institutions when they acquire bad loans.

Data showed that ARCs have acquired total non-performing assets (NPAs) worth ₹19,184 crore in the September quarter, higher than ₹13,852 crore in the June quarter.

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“There is an increase in proportion of unsecured loans being put up for sale recently by non-bank entities (NBFC/MFI). However, transactions have been muted as many ARCs are yet to develop requisite infrastructure to handle such large volume of small-ticket loans. Another challenge is to have KYC compliance in respect of such large number of accounts, and ARCs do not want to have compliance issues around this," said Hari Hara Mishra, chief executive officer, Association of Asset Reconstruction Companies in India.

Lenders have seen growing stress in unsecured loans, with several private banks flagging it after their September quarter financial results. The stress has pervaded their credit card, personal loans and even microfinance portfolios, less than a year after RBI decided to put in place measures to curb exuberant lending.

Last month, Ujjivan Small Finance Bank said that it sold stressed loan portfolio worth ₹270 crore for a consideration amounting to ₹40.55 crore.

Multiple accounts, small outstanding

Typically, an unsecured loan portfolio consists of multiple loan accounts of smaller outstanding, and this poses a big recovery challenge for the ARCs.

Updating the Know Your Customer (KYC) requirement for each loan account is one such challenge that ARCs face. According to these firms, RBI rules mandate that KYC be updated based on the risk categorisation of the customer. For instance, if a customer is perceived as high-risk, then, his KYC needs to be renewed every two years. In the case of medium-risk customers, the KYC needs to be renewed every seven years, and 10 years in the case of low-risk customers.

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“Managing a large number of accounts, and the way RBI is tightening regulation for ARCs, are a big challenge. KYC requirement, customer redressal and updating of data on credit bureau portals are some of the issues," said an official with a large ARC on the condition of anonymity. “RBI has brought ARCs at par with the banks from the regulation point of view. Banks can manage recovery because they have many outlets as compared to ARCs," he added.

Pricing of unsecured loans depending on age and category of borrowers, and collection costs are the other challenges that banks face while acquiring assets.

It’s for this reason that ARCs are ramping up their infrastructure for better recovery as they expect a surge in the sale of unsecured and microfinance NPAs in the coming months.

Eyeing new offices

Some ARCs like Omkara are looking to set up new offices at 10-12 locations across the country and improve their IT systems by March next year.

Private sector banks and non-bank lenders have been grappling with rising stress in their portfolios since the first quarter, resulting in a hit on their profitability. According to TransUnion CIBIL data, credit card defaults worsened to 1.8% as of June 2024, from 1.7% just six months ago, and 1.6% as of March 2023.

Similarly, portfolio quality (PAR - portfolio at risk - 30 to 180) of microfinance loans deteriorated to 2.69% as on 30 June 2024, from 1.8% during the same period last year.

PAR 30-180 is the percentage of loans that are due more than 30 days and less than 180 days.

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As a result of the increasing defaults in the credit card and personal loan portfolios, banks and non-banks have slowed down lending to these segments.

Banks' personal loan growth slowed to 11.5% in October, from nearly 23% a year ago, excluding the merger impact, while growth in credit card outstanding dropped to nearly 17% from 28% a year ago, the RBI data showed.

This slowdown in unsecured loan growth, following the higher capital requirements put in place by RBI, has resulted in total banking credit growth slowing to 12.8% year-on-year last month, compared to 15.4% growth in October 2023.