Retail Bad Loans Surge Faster Than Corporate NPAs in ARCs
Context:
The share of retail bad loans with Asset Reconstruction Companies (ARCs) has been rising at a faster pace than corporate non-performing assets (NPAs), driven by mounting stress in unsecured and microfinance loans.
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- According to data from the Association of ARCs in India, retail NPAs held by ARCs grew nearly 10% to ₹44,060 crore in the first nine months of the current financial year, whereas corporate NPAs increased by 6% to ₹2.58 lakh crore as of December 2024.
- Simultaneously, the total amount paid by ARCs to acquire bad loans from banks and non-banking financial companies (NBFCs) rose by 7%, reaching ₹3.02 lakh crore by the end of December 2024.
Non-Performing Assets (NPAs) are loans or advances provided by banks and financial institutions that have ceased to generate income for the lender due to the borrower’s failure to make timely payments on the principal or interest for a period typically exceeding 90 days. This classification is crucial as it indicates potential default risk and financial instability within the lending institution.
Rising Stress in Retail Loans
- “The faster growth of retail NPAs compared to corporate NPAs indicates increasing stress in the retail lending segment,” said Hari Hara Mishra, CEO of the Association of ARCs in India.
- Over the past decade, the proportion of personal loans in banks’ overall credit composition has surged from 18% in 2014 to 32% in 2024.
- To adapt to this shift, ARCs are strengthening their infrastructure, expanding retail-focused teams, and leveraging advanced technology, including Artificial Intelligence (AI) for real-time loan monitoring and analytics, Mishra added.
Unsecured Loans Adding Pressure on Banks
- Banks have been grappling with rising stress in their unsecured loan portfolios since the beginning of the financial year.
- Private lenders, which had been aggressively expanding personal loans and credit card lending, have been particularly impacted.
- In the third quarter, private banks saw a contraction in their net interest margins, primarily due to an increase in loan slippages—standard loans turning into NPAs—across retail unsecured portfolios, particularly in credit cards, personal loans, and microfinance (MFI) loans.
With the retail lending segment experiencing heightened stress, ARCs are adjusting their strategies to handle the increasing influx of bad loans. As unsecured lending continues to pose risks, banks may need to re-evaluate their lending strategies to mitigate future NPA concerns.
Asset Reconstruction Companies (ARCs) are specialised financial institutions that acquire Non-Performing Assets (NPAs), or bad loans, from banks and financial institutions to clean up their balance sheets. ARCs are registered with the Reserve Bank of India (RBI) and operate under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2002. They are regulated by the RBI as Non-Banking Financial Companies (NBFC). Examples include National Asset Reconstruction Company Limited (NARCL) and India Debt Resolution Company Ltd. (IDRCL).
