Navigating through volatility in the ARC arena

Prakash Somaiya

The after-effects of COVID-19 are increasingly seen today, in the form of job
losses, economic slowdown, and rising non-performing assets (NPA). Financial
institutions primarily involved in money lending functions are currently facing
the heat of bad loans as the risks involved are becoming higher with the
expanding customer base and the growing pool of retail funds.

As a result, for every quarter a financial institution presents its balance sheets,
the headache of non-performing assets negatively impacts its share prices. To
keep the business moving, the financial institution has to cut losses and clean up
the balance sheets for economic viability.

In the past couple of years, the trend of purchasing pools of funds has gained
immense traction. Small bad loans as a group of 1000s of crores are now sold to
account receivable conversion (ARC)s for this purpose. This is because NPA
not only blocks the capital of financial institutes but leads to stagnation in their
growth. Neither can a financial institution generate revenue from the NPA, nor
is it economically feasible to take legal action against defaulters. Also, with the
looming recession threat, the trend of selling NPA to Asset Reconstruction
Companies has further increased.

ARCs before the pandemic mainly focused on large corporate loans. Covid19
forced many small-time borrowers, small businesses, and individuals to borrow
money from banks and NBFCs, further burdening these financial institutions
with huge NPAs. Consequently, ARCs are now purchasing a pool of funds
(real-bad loans) from financial institutions to make up for due diligence and
loan transfer costs.

Earlier, an asset to the tune of Rs. 10,000 crores was simple to maintain for an
ARC on a spreadsheet as it usually comprised over 15-20 bad loans. But as the
ARCs are now purchasing pools of loans worth 10000 crores, maintaining the
same data, interest calculation, and formulating resolution strategies have
become complex and tedious jobs. For instance, ARCs eventually end up with
ten to twenty thousand loans by purchasing such portfolios. Thus, maintaining
these twenty thousand bad loans on a spreadsheet is nearly impossible.

That’s where a need for a system for ARCs has now sprung up as shifting
between large loan portfolios and retail portfolios has different requirements
since both are different segments altogether. By simply incorporating minimal
changes in the existing processes and systems, ARCs cannot meet the varied
requirements that are a part of managing these retail portfolios.

As Asset Reconstruction Companies are absorbing retail loans in their
portfolios, they need systems that allow them to scale without the need for
significant customisations.

Finnate is a unique platform that supports the above-mentioned segments
without additional customisations. From covering the entire loan management
cycle to payment tracking, monitoring risks, and reconstruction, Finnate’s
product-Investfact offers a gamut of features to cater to ARC needs.

Views by – Prakash Somaiya, Director & Business Head Asia & MEA, Centelon Solutions

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