‘The NPA market is not static’

There is still a large volume of NPAs in the banking system. According to numbers available till 2023, the gross NPA of the banking system declined from ₹10.39 lakh crore in 2019 to ₹7.47 lakh crore. However, the write-offs add up to ₹10.79 lakh crore. Assuming, conservatively, even one-fourth is technical write-off (when the NPA is more than four years old and must be fully written off), the amount is ₹2.69 lakh crore, which is available for sale to ARCs and does not appear on the balance sheet.

Besides, NPA stock is not static. There is a flow each year. Fresh NPA accretion has been higher than reduction/ upgradation each year from 2019 to 2023.

Price-expectation mismatch. In many cases, there is a difference in assessment by the seller (bank) and the buyer (ARC) in all three variables — expected realisation, time frame, and the discount factor used to arrive at the net present value, which is the equivalent of price. Since there will always be a difference in the perceptions of buyer and seller, the best possible solution lies in accepting that the market is right, and the price discovered through a competitive bidding process represents the intrinsic value. To address market imperfections, measures like Swiss Challenge are increasingly used, which reinforces transparency and efficient price discovery.

Sellers can also get a better price if the information asymmetry is bridged and all the value drivers of the underlying asset are disclosed. For example, sharing the operational data of a running unit will fetch better price than just the valuation report.

The retail as a part of the security receipt outstanding or assets under management of the ARC industry stands at 14 per cent. Servicing of retail is a completely different vertical. Many ARCs are active in it, with the needed infrastructure in terms of technology, manpower and operating processes. Retail requires capacity building, which may require heavy investment and a tie-up with the right service providers with cutting-edge technology.

The ARC Association, in collaboration with CIBIL [Credit Information Bureau (India) Limited], had done a workshop in March this year to explore synergy in data mining and analytics for the study of delinquency behaviour and financial modelling.

A study of new ARC licence issuance at different stages of networth requirement gives some interesting insights. In 2017, networth of ARCs was raised from ₹2 crore to ₹100 crore; in 2022, this was further enhanced to ₹300 crore. In 2016, when networth requirement had not yet been increased to Rs 100 crore, seven new licences were issued. Only six licences were issued, including NARCL, during 2017-22. 

No licence has been issued after the next hike to ₹300 crore, perhaps because its carrying cost is perceived higher than potential return expectations. In other words, the entry barrier has gone up. The RBI-appointed Sudarshan Sen Committee recommended networth at ₹200 crore.

There could be some consolidation among existing players closer to the 2026 deadline.

The environment is challenging. However, ARCs will continue to play an important role in the financial system. For the first time this financial year, banker(s) are conducting ARC networking meets. The ARC Association welcomes this, as bankers look to ARCs as a holistic solution provider for their NPA problem.

However, ARCs must demonstrate a successful track record to inspire confidence that they generate the best possible monetisation from the NPA pool adjusted on time-value basis.