ARCs getting aggressive in asset purchase: Explained in three charts

Even as asset reconstruction companies (ARCs) complain about issues related to pricing of bad debts by banks, data shows they are doing well and are managing at least a Rs 1 trillion of stressed assets through security receipts (SR).

ARCs are complaining that banks these days are not selling enough loans to them through the SR route, in which the ARC will have to pay 15 per cent of the asset value, while the bank holds the rest. The ARC tries to recover the stressed loans and earn a fee in the process, apart from its own equity.  Edelweiss ARC is currently the top stressed assets buyer, having SRs outstanding of close to Rs 46,424 crore, followed by JM Financial ARC having SRs outstanding of Rs 14,044 crore.   

However, of late, banks are insisting that they want to sell the loans for 100 per cent cash, which the ARCs may not have. According to sources, most of the securities are the result of stressed non-banking financial companies (NBFC) selling their good retail portfolio in order to survive. 

But it is not that ARCs don’t have enough on their plate. Data disseminated by the task force on the development of secondary market for corporate loans, which submitted its report recently, showed that the book value of assets taken over by ARCs from banks and other financial institution was close to Rs 3.8 trillion. Considering the total bad loan in banks’ books is close to Rs 10 trillion, this is about 40 per cent of the total stressed books. 

“ … the ARC model for stressed assets has witnessed significant activity with banks off-loading their stressed assets to ARCs to clean up their balance sheets. The existing recovery ecosystem is fairly well diversified with around 24 ARCs registered with RBI which are currently operating in the market,” the report said. 

Most of the assets picked up by ARCs are corporate loans. However, it is a different issue in the securatisation market, “although the growth has been mostly in retail asset backed and mortgaged backed securities,” the report said. Securitisation refers to converting assets into securities and selling to banks. It can be a single asset, or a pool of assets. 

According to CRISIL estimates, at the end of fiscal 2019, retail mortgage-backed securities outstanding was close to Rs 1.92 trillion.