ARCs See 56% Surge in Bad Loan Purchases in Q1 as Financial Landscape Shifts

In the June quarter, asset reconstruction companies (ARCs) made significant strides in the acquisition of non-performing assets (NPAs), purchasing ₹26,304 crore worth, an impressive increase of 56% year-on-year and nearly double the ₹13,852 crore acquired in the first quarter of FY25. This surge in ARC activity, occurring amidst a general improvement in banks’ asset quality, indicates a strategic shift in the handling of legacy stressed assets, which banks have long sought to resolve. The gross non-performing asset (GNPA) ratio for the banking sector has improved markedly, declining to 1.8% in FY26 from 2.8% in FY24, suggesting a bifurcation in the market dynamics affecting asset sales.

Despite the overall reduction in non-performing ratios, the rise in ARC acquisitions highlights a critical aspect of the banking sector’s ongoing consolidation efforts. The current situation reflects an influx of transactions involving legacy bad loans, with banks opting to offload these assets rather than letting them linger on balance sheets. Additional analytics suggest that while the reported bad loans have decreased significantly—gross NPLs going from 11.2% in 2018 to just 2.2% of advances in 2025—the actual extent of stressed assets, when accounting for written-off loans, remains substantial at ₹12.20 lakh crore. This disparity invites investors to consider the underlying risks that might not be fully represented in headline metrics.

The uptick in ARC transactions also suggests a trend towards a more liquid market environment for distressed assets. Many deals now involve cash payments or hybrid structures through security receipts (SRs), where cash upfront is becoming increasingly prevalent. This shift not only facilitates quicker resolutions but also reinforces the appetite among ARCs to acquire risk-adjusted returns through these distressed assets. The strategic positioning of ARCs in the current landscape could offer lucrative opportunities, and it raises essential questions about the sustainability of this growth in acquisitions. Investors need to remain vigilant, as the tension between reported asset quality improvements and the retained level of stressed assets may signal potential volatility in future quarters.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)