The Reserve Bank of India (RBI) has unveiled a detailed analysis of how Indian banks are cleaning up their balance sheets, revealing a dramatic shift towards market-based solutions for stressed assets. The central bank's latest Report on Trend and Progress in Banking, released this week, provides the first-ever segment-wise breakdown of bad loan sales, highlighting a stark contrast between the strategies of private and public sector banks.
Private Banks Lead the Charge in ARC Sales
The data for the financial year 2024-25 shows a significant acceleration in the sale of non-performing assets (NPAs) to Asset Reconstruction Companies (ARCs). Across all scheduled commercial banks, sales to ARCs jumped to 12.4% of the previous year's Gross NPA (GNPA). This marks a substantial increase from the 5.8% recorded in the 2023-24 fiscal year, indicating a growing preference for this exit route.
However, the most striking finding is the massive divergence between bank categories. Private sector banks sold a staggering 35.9% of their prior-year GNPA to ARCs. In sharp contrast, public sector banks (PSBs) sold only between 2.6% and 3% of their bad loans through this channel. This means private banks relied on ARC sales nearly 14 times more than their government-owned counterparts. Foreign banks topped the list, offloading 55.5% of their previous year's GNPA to ARCs.
Divergent Strategies: Legal Routes vs. Market Exits
Industry experts attribute this chasm to fundamental differences in the age of the bad loans and the resolution philosophy of different bank types. According to Hari Hara Mishra, CEO of the Association of ARCs in India, the divergence stems from the ageing of NPAs and strategic preferences.
"This huge divergence in Public Sector Banks vs others is possibly, amongst others, due to ageing of NPAs," Mishra explained. "PSBs are selling accounts that are mostly written off and marked down, while foreign banks and private banks are offloading early-stage NPAs. For public sector banks, there is a marked preference towards legal mechanisms like DRT, SARFAESI & IBC, while private and foreign banks prefer an early exit through market mechanisms like sale to ARCs."
Slow Progress on Legal Recovery Front
While market-based sales surged, recoveries through established legal channels saw only marginal improvement. The combined recovery rate from forums like Lok Adalat, Debt Recovery Tribunals (DRT), the SARFAESI Act, and the Insolvency and Bankruptcy Code (IBC) inched up to 18.0% in 2024-25 from 17.2% the year before. These processes continue to be time-consuming, with average realisation periods stretching between 3 to 4 years.
The RBI report underscores a clear bifurcation in the Indian banking system's approach to stressed assets. Private and foreign banks are aggressively using ARCs to swiftly remove bad loans from their books, opting for a cleaner break. Public sector banks, burdened with older NPAs, continue to navigate the protracted legal labyrinth, showing a distinct reliance on judicial and quasi-judicial resolution mechanisms.
