ARCs’ retail loan recovery slows by 35%, may extend timelines

India Ratings and Research said in a note that redemptions by asset rebuilding companies (ARCs) across retail loans such as housing and MSMEs slowed down, by 35 per cent to the principal amount due, during the June-December 2022 period.

This is because after the launch of the One-Time Settlement (OTS) regulations in October 2022, ARCs began to take steps calculated to ensure deliverables, which led to lengthy settlement process timelines, as well as the withdrawal seen during the Covid-19 pandemic.

“This has slowed the pace of recovery, and recovery timelines could be extended by three to four quarters,” the ratings agency said, adding that although there was no significant rating transition in its rated portfolio of security receipts (SRs). So far, the impact of the regulation can be seen in the upcoming cycles.

The standards stipulated require an independent advisory committee to scrutinize all receivables settlements with borrowers including retail, SME and MSME loans. Furthermore, all avenues for recovery must be exhausted before settlement can take place.

“According to the agency’s discussions with ARCs, for SAR-backed retail loans, settlement or spot payments has been the most preferred method for redeeming ARCs in the past because it would increase the redemption amount and reduce the costs associated with repossessions and foreclosures.”

She added that even with the size of the recovery unaffected, there would be delays in recovery timelines by three to four quarters.

As the operating environment returns to normal, cuts are expected to slow in the coming quarters. However, OTS guidelines can make it easier to withdraw ratings and thus temporarily increase the ratio of demotion to promotion. The ratio of discounts to promotions for the retail world was 1.75 times during the December 2022 review compared to 1.5 times during the June 2022 review and 1.25 times in December 2021.