ARCs spot opportunity in written-off accounts

ARC executives find written-off assets particularly appealing as the number of sizeable bad loans awaiting recovery have dipped, thanks in part to banks’ persistent corrective measures, including selective targeting of corporate borrowers. In fact, banks’ consistent efforts have resulted in a decline of gross bad loans to 3.9% of total loans, marking the lowest level since 2013.

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Despite the muted beginning, National Asset Reconstruction Co. Ltd has secured some large toxic assets, limiting the operating space for other ARCs. Many large ARCs have also shifted focus towards buying and recovering retail bad loans in recent years. “Going forward, ARC sales are likely to continue recording double-digit growth with retail loans and written-off accounts playing bigger a role in the portfolios put up for sale," said Hari Hara Mishra, chief executive, Association of Asset Reconstruction Companies in India.

Apart from banks, non-banking financial companies, too, will play a pivotal role in offloading bad loans to maintain a clean balance sheet, Mishra said. According to data compiled by the association, asset sales to ARCs grew nearly 30% in 2022-23.

Lenders sell distressed loans to ARCs at a discounted rate, either in cash or a combination of cash and security receipts. However, cash is the preferred option for most lenders. These security receipts hold redemption value, which is claimed once the ARC successfully recovers a specific loan.

Between FY18 and FY22, banks have written off ₹10.2 trillion bad loans, showed data from the Reserve Bank of India (RBI). In its Report on Trend and Progress of Banking in India in December, RBI said the reduction in non-performing assets of state-owned banks in FY22 was primarily due to loans being written off. However, industry officials said that while written-off assets present opportunities, they are likely to adopt a pick-and-choose approach for technical write-offs, or loans where banks are still actively seeking recovery avenues. Technical write-offs are undertaken by lenders to cleanse the balance sheets of bad debts, which are either considered unrecoverable, or where the cost of recovery may disproportionately burden lenders, according to RBI. “ARCs do not differentiate between regular bad loans and those that have been written off, provided these are technical write-offs. If it has been finally written off, the debt is no longer alive and therefore cannot be assigned to ARCs," said Pallav Mohapatra, chief executive, Asset Reconstruction Co. (India) Ltd.

Ensuring a favourable pricing for such assets is crucial as it is necessary for ARCs to have sufficient room for recovery, said Mohapatra. “Recovery from written-off accounts does present an opportunity, but as I said, the debt should be alive."

The government’s ambitious recovery targets for state-owned banks are proving to be advantageous for the ARC industry.

Mint reported on 1 May that the finance ministry wants public sector lenders to recover at least ₹2 trillion from written-off loans. According to another ARC executive, if the accounts put on sale are technical write-offs, the chances of recovery are higher than those of actual write-offs.

“The reason is banks would have tried for several years and only then they would have written off completely, while in case of technical write-offs, it is more of a balance sheet management tactic," said the ARC executive mentioned above.

While pricing should be seen on a case-to-case basis, if written-off assets worth, say, ₹100 are put up for sale, only ₹30-40 would be worth buying, he added.