OTS slows down recoveries from retail portfolios for ARCs to 35%: Report

Recoveries by asset reconstruction companies (ARC) from retail loan portfolios have slowed down to 35 per cent since the launch of the one-time settlement (OTS) scheme in October last year, a domestic rating agency said on Thursday.

The ARCs have started following measured steps to ensure realizations, which has slowed down the pace of recovery, and the recovery timelines can have got stretched by three to four quarters, India Ratings and Research said in a report.

Recoveries across retail loan, including housing and ones to micro, small and medium enterprises, have seen a drag, coming at 35 per cent of the principal outstanding during June-December 2022 review cycle, the agency said.

The rating agency said a change in prescribed norms, which now require an independent advisory committee to examine all settlement of dues with borrowers including retail, SME and MSME loans may be resulting in this and added that as per OTS, all the methods of recoveries shall have to be exhausted before a settlement process takes place.

Citing its discussions with ARCs, the rating agency said for retail loans backed security receipts, settlement or staggered payments were the most preferred method of recovery for ARCs in the past as it would increase the recovery amount and reduce the costs associated with repossession and foreclosure.

The agency, however, made it clear that the new rules will not impact the quantum of recovery, but there shall be a delay in the timelines to recovery by three to four quarters.

While recovery efforts take a hit in the near-medium term, the new guidelines could benefit counterparties to SR transactions in the longer term amid the growing requirements of the financial sector.

ARCs can tap their unused potential to resolve stressed assets, while the OTS process will also enhance the transparency and bring consistency in the settlement processes, the agency added.