Why this class of companies is waiting for more corporate failures

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₹48,000 crore to J.C. Flowers Asset Reconstruction Pvt. Ltd in December 2022 for ₹11,183 crore.

The lender claimed the deal was the largest such transaction. Before August 2014, ARCs used to pay just 5% upfront cash to banks. The rest was given in the form of security receipts the banks subscribed to.

This changed under former governor Raghuram Rajan, when the RBI said ARCs had to pay at least 15% in cash. In October 2022, the RBI made changes to this guideline, as well; the central bank said that ARCs had to invest at least 15% of the investment made by banks in security receipts, or 2.5% of the total receipts issued, whichever was higher. Now, in a sign that NPA levels are being contained, security receipts issued by ARCs grew at a slower pace year-on-year in FY24, as per data from the ARC association.

While the growth rate was 20% in FY23, it stood at 15% in FY24. Crisil believes there is still a large opportunity in the existing stock of stressed corporate assets, with banks having written off over ₹13 trillion of NPAs between fiscal years 2018 and 2024. However, Narayanan said that this vintage stock is a focus more for NARCL, whereas private ARCs are looking at bad loans of more recent origin as their resolution is typically faster.

The primary advantage of NARCL over private ARCs is that its security receipts are guaranteed by the government and it buys assets under the 15% upfront payment arrangement, as compared to the full cash payment expected of others. But the bad bank, too, has not been performing as expected. NARCL was incorporated in July 2021, after finance minister Nirmala Sitharaman had announced it in her budget speech that February.