Mumbai: Indian state-owned lenders are accelerating the sale of legacy bad loans to asset reconstruction companies (ARCs) ahead of the Reserve Bank of India’s (RBI) tougher expected credit loss (ECL) norms.
Public sector banks accounted for ₹50,000 crore of the nearly ₹60,000 crore of stressed assets offered for sale in the April-June quarter, industry data compiled by the Association of ARCs in India showed. Private sector banks put up ₹8,000 crore of bad debts for sale, with the remaining ₹2,000 crore coming from non-banks and mortgage lenders.
This marks the first time that data on bad loans put up for sale has been compiled by lender category.
Details on how much of the ₹60,000 crore offered for sale was eventually acquired by ARCs in the April-June quarter will be available only in August. In the corresponding quarter of FY26, ARCs acquired bad loans worth ₹16,876 crore, compared with ₹13,852 crore a year earlier, across public and private sector lenders.
The RBI’s ECL framework, which takes effect from April 2027, will require banks to recognize potential loan losses earlier and hold higher provisions against them. Industry executives said lenders are trying to pare legacy bad loans before the new regime comes into force.
“We were flooded with emails and auction announcements by banks, especially public sector lenders, in Q1,” said a director at an ARC on condition of anonymity, adding that this level of interest was seen after several quarters.
Hari Hara Mishra, chief executive of Association of ARCs in India, said sale to ARCs gives banks upfront payment and an immediate exit from a bad loan, unlike other legal measures, where recovery is the ultimate outcome.
“For written-off accounts, it adds to the bottom line of banks, which they may use to meet additional provisions required on migration to the ECL framework,” Mishra said, adding that the key motivation for small banks and non-banking financial companies (NBFCs) is to gain market recognition, as a healthy balance sheet typically commands a valuation premium.
In FY26, banks sold loans worth ₹2 trillion to ARCs as against ₹5.9 trillion in FY25, and ₹1.7 trillion in FY24, showed data from the Association of ARCs. The number for FY25 includes ₹4.2 trillion of assets acquired from The Stressed Assets Stabilisation Fund (SASF), a government-backed vehicle created in 2004 to resolve bad loans.
How it works
Lenders sell stressed loans to ARCs at a discount, either in exchange for cash or a mix of cash and security receipts that are redeemable as and when the ARC recovers a loan, with the regulatory limit set at eight years.
Banks prefer to write off loans after they remain overdue for years. These are backed by 100% provisions, although lenders continue recovery efforts even after such loans have been written off.
“Of the total recovery guidance we have given of ₹13,000 crore, we are expecting ₹4,000 crore will happen through the technically written-off route now,” Ashok Chandra, chief executive of Punjab National Bank, told analysts on 18 July.
A financial services analyst said recoveries from written-off accounts can boost banks’ other income and improve profitability. Since the additional provisions under the ECL model would come from profits, recovering from written-off accounts would supplement those provisions to some extent.
Government data shared in the Lok Sabha in March showed that banks wrote off loans worth ₹1.7 trillion in FY25 (latest available), as against ₹1.8 trillion in FY24.
Judicial scrutiny
Bad loan sales by state-owned banks to ARCs recently came under scrutiny. Legal news portal Live Law reported that the Supreme Court on 19 July expressed serious concern over the manner in which public sector bank loans are assigned to ARCs.
It said there is a need to examine the conduct of ARCs and the larger mechanism through which large loan liabilities are settled for a fraction of their value.
“For legacy and written-off accounts, banks are unable to find out the real value, who the buyer is, and if there could be issues with the account at a later date,” said Nirmal Gangwal, founder of Brescon, a Mumbai-based single-family office, and a financial turnaround and restructuring veteran. “The same promoters can come back in the name of somebody else, which would be bad for banks.”
Gangwal said ARC auctions follow a well-defined process approved by the board and conducted within regulatory norms, leading to systematic recoveries. Therefore, no one can be blamed, as the process follows due procedure.
“Banks have a separate department for stressed assets, but for these (written-off) assets, it is not worth their time and energy. Since there is so much liquidity in the market, banks also feel that someone can bid and take care of the recovery,” he said.