The share of retail bad loans with Asset Reconstruction Companies (ARCs) has risen at a faster pace than corporate non-performing loans (NPAs), driven by increasing stress in unsecured and microfinance loans. Retail NPAs of ARCs have grown by nearly 10% to Rs 44,060 crore in the first nine months of the current financial year, while corporate NPAs have risen by 6% to Rs 2.58 lakh crore as of the end of December 2024, according to data from the Association of ARCs in India. Meanwhile, the amount paid by ARCs to acquire bad loans from banks and non-banking financial companies has increased by 7% to Rs 3.02 lakh crore as of December 2024.
“The pace of growth of retail NPAs to ARCs is higher than corporate, a possible indicator of more stress in the retail segment. In the last 10 years, the personal loans in the overall credit composition of banks have gone up from 18% in 2014 to 32% in 2024,” said Hari Hara Mishra, CEO, Association of ARCs in India. “ARCs are gearing up to meet this strategic shift in market dynamics and expect higher flow of retail loans in coming years,” he said.
To meet this demand, they are ramping up infrastructure in terms of a more retail-focused team, analytical models and use of advanced technology including Artificial Intelligence for real-time monitoring, added Mishra.
Banks started to see stress rising on their unsecured boom since the start current financial year. Private lenders, which were aggressive in the growing personal loans and credit cards, have been hit hard by this rise. Private banks witnessed a contraction in their net interest margins in the third quarter, impacted by the rise in slippages, which refers to standard loans turning into bad loans, in their retail unsecured portfolios, particularly in credit cards, personal loans, and microfinance (MFI) loans.
“Private banks are encountering challenges due to rising stress unsecured personal loans and in microfinance segment. This stress is likely to continue in the current quarter also,” said a senior official of a private bank.
In the third quarter of the current financial year, select private banks have an average gross non-performing assets (GNPAs) of around 4% in microfinance and the unsecured retail segments due to rising delinquencies, according to Care Ratings.
“Private banks witnessed 6 bps year-on-year increase (in credit cost) due to some strain in select sectors. The increase in the credit cost of private banks is majorly attributed to higher slippages and stress in the microfinance and credit card segments leading to increased provisions,” said Sanjay Agarwal, senior director, Care Ratings.
The total issuances of security receipts (SR) in the first nine months of FY25 stood at Rs 3.02 lakh crore as of December end 2024 from 2.83 lakh crore representing a growth of 6.7%. SR is an instrument like a pass-through certificate which is issued by ARCs to investors, representing their rights over realisations from underlying assets.
