ARCs rebound as banks speed up bad loan sales

MUMBAI: The bad loan business showed faint but firm signs of recovery in September 2025, as the portfolio of asset reconstruction companies (ARCs) turned positive after two quarters of contraction. The rebound came despite rating agencies predicting a continued shrinkage in the sector, with banks accelerating sales of retail stressed assets to clean up their books. Many lenders now see the market reward of a stronger valuation on reporting lower bad debt as outweighing the higher cost of provisioning.

The shift also reflects the pressure of new expected credit loss norms, which compel banks to set aside funds based on the likelihood of default rather than the time elapsed since the default occurred. The tighter regime makes early disposal of bad loans the more rational choice.

Fresh acquisitions by ARCs rose to Rs 6,721 crore in the Sept quarter from Rs 4,388 crore in the June quarter. Retail loans formed a large part of this growth, increasing to Rs 3,118 crore from Rs 1,703 crore in the same period. The shift reflects a decade-long change in bank credit composition, with personal loans expanding 398% between Mar 2015 and Mar 2025, compared with a 48% rise in industrial credit.

According to Hari Hara Mishra, CEO, Association of ARCs in India, as peer pressure builds up, banks or NBFCs, which are mostly listed, try to address NPAs by all possible means. "Sale to ARCs results in quick exit and a healthy balance sheet, vis-a-vis indefinite wait for realisation through prolonged litigation, and hence financial institutions are preferring ARC sale as effective and optimal solution subject to price expectation match," he added.

Data from the Association of ARCs shows total dues acquired rose to Rs 16,88,091 crore in Sept from Rs 16,50,709 crore in June.