Crisis Perspective on ARC: Changing Bad Loan Dynamics Will Force ARC to Change its Business Model: Experts
Regulations may also evolve to allow ARCs to purchase distressed loans from private credit funds and AIFs, leveraging their expertise in recovery.
Ratings agency Crisil, which hosted the webinar, said it expects the sector’s assets under management (AUM) growth to moderate to 5%-6% in the fiscal year ending March 2025, from 17% in March 2023. Large transfers from a bank (Yes Bank) to ARC (JC Flowers) are not possible.
The Crisil study pointed out various changes in the non-performing asset environment, including higher NBFC sales in the current fiscal, higher retail and microfinance lending, more than half of transactions in cash compared to 30% in fiscal 2021, and increased redemption of security receipts.
Management acknowledged the decline in NPA supply by saying there are still opportunities to exploit.
“It is not that NPAs have gone away. There is a stress and NPA account of Rs 9 lakh crore in the bank account that can be moved to ARC. In fact, AIFs can partner with ARC to leverage the ability to use SARFAESI, especially in real estate,” EY said. said Abizer Diwanji, Head of Financial Services, India. He cited the ARC’s ability to use the SARFAESI Act to auction commercial or residential properties to recover loans when borrowers fail to repay the loan amounts. Diwanji also expects the supply of NPAs to arise due to increased stress in the startup ecosystem, where companies like Byju are struggling. Allowing ARCs to purchase debt from private credit and other funds will help accelerate the recovery, said Sanjay Tibrewala, CEO of Phoenix ARC.
“Like we saw with telecoms or airlines, we will be left with only two to five players. Investors, AIFs and ARCs will have to change their business models,” Tibrewala said.
Crisil also pointed out regulatory issues such as high net-funding criteria, including the Rs 1,000-crore requirement if ARC wants to bid for the IBC resolution process.
Avinash Kulkarni, CEO of Indian Debt Consolidation Company Limited (IDRCL), the sole agent of the government-backed National Asset Reconstruction Company (NARCL), said his company was eligible but the bar was too high.
Crisil noted that although the ramp-up schedule under IBC remains a challenge, the 33-37% recovery through this mechanism is still higher than the 23-27% through SARFAESI and 9% through debt recovery tribunals.
EY’s Diwanji pointed out that lenders should also change their attitude and be open to accepting equity stakes in distressed companies to provide a positive aspect and meet the requirements of resolution applicants.
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