Mint Explainer | What the listing plans of India’s oldest bad bank say about the asset reconstruction industry

If approved, it will become India’s first listed ARC.

Mint takes a look at the draft red herring prospectus (DRHP) to assess the state of India’s ARCs—once touted as lenders’ key weapon for recovering bad loans.

What do ARCs do?

ARCs are specialized institutions that help lenders recover their stressed assets. Lenders sell stressed loans to ARCs at a discount for either cash or a mix of cash and security receipts. Cash is preferred as security receipts are redeemable after the ARC has recovered the loan.

However, the going has not been easy for India’s asset turnaround vehicles. The industry’s size—measured by the amount of outstanding security receipts —stood at ₹1.34 trillion at the end of 2024-25, declining from ₹1.39 trillion in 2023-24 as well as 2022-23, according to data from the Association of ARCs in India.

Rating agency Crisil estimated in July that assets under management of private ARCs are expected to decline 4-6% to ₹1.05 trillion in 2025-26.

Since when have ARCs been around?

In 1998, a committee headed by former Reserve Bank of India (RBI) governor Maidavolu Narasimham recommended the setting up of ARCs. Following this, the Union Budget of 1998-99 nudged banks with a high level of bad loans to set up ARCs. Parliament passed the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act in 2002 to give these new entities legal backing.

How has ARCIL’s performed?

Formed in February 2002, ARCIL is the oldest Indian ARC, with Assets Care and Reconstruction Enterprise Ltd (ACRE) being the other asset turnaround company founded in June of the same year. With outstanding security receipts or assets under management (AUM) worth ₹15,230 crore, ARCIL was the second-largest ARC in the country after Edelweiss Asset Reconstruction Co. Ltd (Edelweiss ARC), which had an asset base of ₹31,590 crore and a market share of 21.3% as on 31 March 2024.

However, the tables turned in 2024-25 as Edelweiss ARC’s AUM shrank to ₹14,710 crore and ARCIL’s grew to ₹16,850 crore, making it the largest in business. However, its revenue from operations at ₹478 crore is still roughly one-third of Edelweiss ARC’s ₹1,395 crore.

What are some of the challenges being faced by the industry?

The establishment of a state-owned ARC in 2021 has been the hardest to deal with for the industry. According to the ARCIL’s DRHP, the emergence of National Asset Reconstruction Co. Ltd (NARCL) can lead to increased competition in the sector, potentially affecting the ability of private players to acquire stressed assets at favourable prices.

The draft added that the security receipts issued by this ARC are backed by the Government of India, which may make it a preferred choice for banks and financial institutions over other ARCs. However, NARCL is not a primary competitor since it only deals in stressed assets of ₹500 crore and above, whereas the private ones have no such restrictions.

That apart, the lack of corporate bad loans has also been detrimental to the industry. For ARCIL, corporate bad loans accounted for 75.5% of its total AUM in the last fiscal. In comparison, corporate bad loans accounted for 93% of Edelweiss ARC’s AUM as on 31 March 2024 (latest data), showed the draft prospectus.

The RBI has also been tightening regulations on ARCs. In 2024, it mandated higher minimum net owned funds of ARCs to ₹300 crore from ₹100 crore earlier. However, the banking regulator offered a glide path and said ARCs could first get to ₹200 crore by the end of March 2024 and to ₹300 crore by March 2026. Net owned funds are similar to net worth and are defined as the difference between what a company owns and owes. That apart, according to a Crisil report in July, draft guidelines published by the central bank in April on securitization of stressed assets will offer lenders an alternative to the existing ARC mechanism.

How are ARCs coping with fewer large corporate bad loans?

ARCs have turned to retail non-performing assets as corporate bad loans are fewer than they used to be. ARCIL said in its draft papers that it is focused on increasing the proportion of retail loans in its portfolio. The share of retail loans has been rising as well, with such individual loans forming 16.3% of the AUM as on 31 March, up from 12.8% in end-March 2024 and 9.6% in end-March 2023.

The DRHP, citing data from credit bureau Experian and CRISIL Intelligence, showed that stressed assets in the retail segment stood at ₹6.9 trillion as of 31 March 2025, as against ₹6.5 trillion a year ago, and ₹ ₹5.3 trillion as of March 2023.