Even as the wait goes on for the National Asset Reconstruction Company (NARC), or ‘bad bank’, which was announced in the previous Union Budget and proposed reforms for the private asset reconstruction companies (ARCs) to take off, the dead weight of old accounts continues to languish on the banks’ books.

With the recovery rate slipping and the chances of more potential bad loans in the future emerging, new buyers are needed for these bad loans. Delays in bad loan resolution have meant that the recovery rate from bad loans, which jumped from 26% pre-bankruptcy code to around 39% as of FY21, is slipping again.

An RBI panel had proposed major reforms for ARCs which included allowing ARCs to submit resolution plans for bankrupt companies.

The next wave of NPAs will emanate from stressed MSME and retail sectors after the available restructuring windows close, Hari Hara Mishra, director, UV ARC told TOI. “For transfer of these small-ticket loans to ARCs, there is an urgent need to broad base investor base with inclusion of high net-worth individuals, corporates, family offices, trusts to subscribe to ARC security receipts, as recommended by the RBI appointed committee recently,” he added.

The authorities must focus on additional challenges that affect the majority of corporate insolvency resolution processes (CIRPs) such as being cash-starved leading to inordinate delays, Kundan Shahi, founder and CEO of LegalPay said. “There is also a lack of clarity on the position of the interim financier as to what information the financier is privy to and clear-cut guidelines for institutions lending in this space. In addition, a framework for fast-track disposal of litigations for timely completion of the CIRP process is also the need of the hour,” said Shahi.

Edelweiss ARC MD R K Bansal has said that there is a need to discontinue the minimum alternate tax (section 115JB) that is currently levied on a company whose application under the provisions of IBC has been admitted by NCLT, till the time that the company’s prospects turnaround considering the resolution plan submitted to the NCLT.

“This would benefit in carrying forward the entire brought forward book losses and unabsorbed depreciation for set off in future years, thereby making the acquisition of distressed companies more lucrative,” Bansal said. Buyers of insolvent companies face tax demands if the price they pay is less than the fair market value or the listed price. As speculators can ramp up prices of even insolvent companies with zero net worth, the market price is not reflective of underlying value.

Another hindrance for an ARC in resolution is the 1% tax deduction at source (TDS) on sale of immovable property under Section 194-IA. “The ARC exercises its rights under the Sarfaesi Act as a secured lender and only appropriates the proceeds to the extent of its dues. Any excess amount realized over and above the dues is returned to the borrower. Therefore, TDS on sale of property under Sarfaesi may be kept out of the purview of Section 194-IA,” said Bansal.