SARFAESI and DRTs yielded recovery rates comparable to the IBC mechanism

Banks have multiple channels through which stressed assets can be resolved. As fresh insolvency cases could be admitted after the one year suspension during COVID-19, admissions under the IBC increased by 65 per cent during 2021-22. Although the number of cases referred under Lok Adalats and SARFAESI Act increased by 336 per cent and 335 per cent, respectively, the IBC mechanism was the leader in terms of amount involved.

NPAs of SCBs Recovered through Various Channels

Defying the lull in the interim years, SARFAESI and DRTs yielded recovery rates comparable to the IBC mechanism. The pre-pack insolvency resolution process, introduced for MSMEs in April 2021, is yet to gain traction and only two cases have been admitted under the channel so far (up to September 2022).

Sales of stressed assets to asset reconstruction companies (ARCs) is another mode of their resolution. However, sales to ARCs have gradually decreased over the years, and in 2021-22, only 3.2 per cent of the previous year’s GNPAs were sold to ARCs. The ratio of acquisition cost to book value increased marginally, denoting slightly higher recovery rates for the selling banks.

Stressed Asset sales to ARCs

Although the Reserve Bank has been disincentivising banks from holding excess security receipts (SRs) through increased provisioning, the share of SRs subscribed by banks in total SRs issued increased to 68 per cent in 2021-22. However, the share of ARCs declined to 10 per cent from 17.5 per cent a year earlier, indicating some diversification in investor base. Redemption of SRs issued by ARCs, which is an indicator of recovery through this mode, increased during the year, resulting in a decline in the total SRs outstanding.

Details of Financial Assets Securitised by ARCs

Facilitating ARCs’ role in resolution of stressed assets:?The guidelines permit ARCs to invest in the SRs at a minimum of either 15 per cent of transferors’ investment in the SRs or 2.5 per cent of the total SRs issued, whichever is higher, vis-à-vis the previous requirement of 15 per cent of total SRs issued in all cases. This is expected to result in efficient utilisation of capital, thus enabling ARCs to participate in more and bigger deals. ARCs have also been permitted to invest surplus funds in certain additional short-term instruments viz., money market mutual funds, certificates of deposits and AA- or above rated corporate bonds/ commercial papers. Moreover, ARCs with minimum NOF of Rs. 1000 crore have been permitted to act as resolution applicants under IBC. On the other hand, lenders have been permitted to transfer all stressed loans to ARCs visà-vis earlier stipulation of transfer of only those stressed loans which were in default for more than 60 days. This is expected to facilitate debt aggregation as well as better reconstruction and recovery from stressed assets.

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(Source:?RBI Report on Trend and Progress of Banking in India, released on 27.12.2022)