Indian state-owned lenders are accelerating the sale of legacy bad loans to asset reconstruction companies (ARCs) ahead of the Reserve Bank of India's tougher expected credit loss (ECL) norms. According to industry data gathered by the Association of ARCs in India, of the ₹60,000 crore put up for sale in Q1, ₹50,000 crore originated from state-run banks. Private sector banks contributed ₹8,000 crore of bad debt for sale, with the remaining ₹2,000 crore coming from non-banks and mortgage lenders. This marks the first time that data on bad loans put up for sale has been compiled by lender category.
Details on how much of the ₹60,000 crore offered for sale was eventually acquired by ARCs in the April-June quarter will be available only in August. In the corresponding quarter of FY26, ARCs acquired bad loans worth ₹16,876 crore, compared with ₹13,852 crore a year earlier, across public and private sector lenders. In FY26, banks sold loans worth ₹2 trillion to ARCs as against ₹5.9 trillion in FY25, and ₹1.7 trillion in FY24, according to data from the Association of ARCs.
The RBI's ECL framework, which takes effect from April 2027, will require banks to recognize potential loan losses earlier and hold higher provisions against them. Industry executives said lenders are trying to pare legacy bad loans before the new regime comes into force. As reported by Mint, a director at an ARC noted that they were flooded with emails and auction announcements by banks, especially public sector lenders, in Q1, adding that this level of interest was seen after several quarters.
Lenders sell stressed loans to ARCs at a discount, either in exchange for cash or a mix of cash and security receipts that are redeemable as and when the ARC recovers a loan, with the regulatory limit set at eight years. According to Mint, Hari Hara Mishra, chief executive of Association of ARCs in India, explained that sale to ARCs gives banks upfront payment and an immediate exit from a bad loan, unlike other legal measures where recovery is the ultimate outcome. For written-off accounts, it adds to the bottom line of banks, which they may use to meet additional provisions required on migration to the ECL framework.
Bad loan sales by state-owned banks to ARCs recently came under scrutiny. Legal news portal Live Law reported that the Supreme Court on 19 July expressed serious concern over the manner in which public sector bank loans are assigned to ARCs. The court said there is a need to examine the conduct of ARCs and the larger mechanism through which large loan liabilities are settled for a fraction of their value. Nirmal Gangwal, founder of Brescon, noted that banks are unable to find out the real value, who the buyer is, and if there could be issues with the account at a later date, as the same promoters can come back in the name of somebody else.
