Sale to ARCs seen unlocking capital for expected credit loss shift
As at March-end 2025, while scheduled commercial banks’ pool of gross non-performing assets (GNPAs) stood at ₹4,19,099 crore, the pool of technical write-off (TWO) accounts is estimated to be at least double the GNPA amount. | Photo Credit: iStockphoto
Sale of a portion of the huge pile of technical write-off accounts to asset reconstruction companies (ARCs) could emerge as a linchpin for banks to unlock funds to make provisions for loans under the ECL (expected credit loss)-based regime, which will come into effect from April 1, 2027.
As at March-end 2025, while scheduled commercial banks’ pool of gross non-performing assets (GNPAs) stood at ₹4,19,099 crore, the pool of technical write-off (TWO) accounts is estimated to be at least double the GNPA amount. Up to 40 per cent of the TWO accounts have the potential to be recovered, according to estimates.
Recovery process
Referring to the Finance Ministry’s nudge to banks three years ago to step up recovery from written-off accounts from just 14 per cent then to 40 per cent, a senior public sector bank official said the time is now ripe for fast-tracking recovery from TWO accounts in the backdrop of the requirement for making provisioning as per ECL norms.
TWO accounts refer to loans that have remained in the non-performing category for four years or more and for which full provisioning has been made. So, such accounts are a potential goldmine that banks can harness to make provisions under the ECL framework.
“There is a huge pool of technical write-off accounts off the balance sheet of banks, possibly larger than NPAs appearing on their balance sheet. Recovery in these accounts goes straight to banks’ bottom line.
“So, sale of such accounts to ARCs can be explored as an option to meet additional provisioning requirements on account of migration to the ECL framework,” said Hari Hara Mishra, CEO, Association of ARCs in India.
Currently, banks make provisioning only when a default occurs under the incurred-loss-based provisioning framework. However, next year banks will move to the ECL-based provisioning norm, whereby they have to estimate and provide for potential future credit losses before they actually occur.
ARCs focus shifts to TWO a/cs
Alluding to NPAs hitting multi-decadal lows, with GNPAs at 2.20 per cent and net NPAs at 0.50 per cent as at September-end 2025, the Chief of an asset reconstruction company (ARC) said unlike earlier phases when ARCs focused on newly classified NPAs, the focus has now shifted decisively toward fully written-off accounts.
“The rationale for selling fully provisioned written off assets is straightforward. Bank managements prefer to focus their bandwidth on the performing 98 per cent of the book rather than the distressed 2 per cent, which are hard nuts to crack. Recoveries from sale of such assets results in a direct write-back to profits,” the ARC chief quoted above said.
Crisil Ratings, in a recent report, assessed ECL norms to have a one-time net impact of up to 120 basis points (bps) on banks’ Common Equity Tier 1 (CET-1) ratio. However, they get to defray this cost across four fiscals, while additional advance provisioning can also reduce the impact.
In its circular on compromise settlements and technical write offs, RBI noted that TWO is a normal banking practice undertaken by lenders to cleanse the balance sheets of bad debts, which are either considered unrecoverable or whose recovery is likely to consume disproportionate resources of the lenders.
However, such TWOs do not entail any waiver of claims against the borrower and lenders’ right to recovery is not undermined in any manner.
Therefore, the defaulting borrowers are not benefited in any manner and their legal obligation as well as the costs of such defaults for them remain unchanged vis-à-vis the position prior to twos.
Published on May 3, 2026
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