Bad loans in the retail segment may rise in March, June quarters says ARC chief

‘Some restructured loans may again turn into non-performing assets’

Retail bad loans of banks are likely to rise as some restructured loans may again turn into non-performing assets, said R.K. Bansal, MD and CEO, Edelweiss Asset Reconstruction Company (EARC).

To minimise losses, banks are seen offloading their bad loans to asset reconstruction companies (ARC) and the figure is on a rise.

According to ARC industry data, in FY20 about ₹2,000 crore of principal book balance was assigned to ARCs in FY20, while the figure rose to ₹6,500 crore in FY21.

In the first 9 months of FY22, about ₹7,000 crore principal book balance was assigned to ARCs.  However, the situation in the retail loan segment had been gradually improving in the last 6 months except for a spike in January due to the third wave of COVID-19, ARC industry executives said.

“Two things happened during this period: there has been improvement in collections, and restructuring of some retail loans by lenders also took place,” Mr. Bansal said.

“However, some of these restructured loans may again turn bad which shall reflect in the March and June quarter numbers,” he said.

Out of the ₹7,000 crore bad loans which had been sold to ARCs In the first nine month of FY22, about 50% had been acquired by EARC.

As per Trans Union-Cibil data [provided by EARC], as on September 30, 2021, the GNPA ratio in secured mortgage (home loans, loans against property) was 3.7% while in case of secured, non-mortgage (auto and gold loans) the ratio was 9.6%.

For unsecured loans such as personal loans, education loans, credit card outstandings, and consumer, Mudra and MFI loans, the GNPA ratio was 8.47%.

In less than three years, EARC said it had witnessed its retail portfolio grow with the acquisition of principal dues of about ₹7,000 crore from a large number of banks and NBFCs that had assigned their NPAs to ARCs, both in cash as well as via the Security Receipts route.

The retail portfolio involves attending to a large number of distressed borrowers across geographies who may have gone through economic woes exacerbated by the pandemic, it said.

“The country is facing a catastrophic situation for an extended period of two years due to Covid-19 which has impacted everybody including us,” said Mr. Bansal.

“We have witnessed recovery numbers falling down, distressed situation with borrowers increasing in the last few years, a slowdown in the movement of people and the litigation machinery,” he added.