Thrissur-based ESAF Small Finance Bank has approved the sale of Rs 735 crore worth of non-performing and written-off loans to asset reconstruction companies (ARCs) even as stress in the microfinance sector has been mounting.

While non-performing assets (NPAs) amount to Rs 362.43 crore, technically written-off loans consist of Rs 372.75 crore. 

The lender has made provisions covering 90.15% of these assets.

The bank, however, did not specify the type of loans being sold.

Small finance banks have seen rising stress in recent quarters, especially in the microfinance segment. Aggressive credit expansion and borrower over-leveraging has marred the sector, providing ARCs a source to acquire these stressed assets.

Earlier, Asset Reconstruction Company (India) Ltd (ARCIL) acquired Ujjivan Small Finance Bank’s non-performing microfinance portfolio of Rs 365.5 crore for just Rs 34.26 crore, resulting in a recovery rate of only 9.39%. This meant a haircut of over 90% for the lender.

IndusInd Bank had also invited bids from ARCs to sell Rs 1,573 crore of retail non-performing microfinance loans from over a million accounts. Similarly, Utkarsh Small Finance Bank sought to sell around Rs 355 crore of microfinance loans and fixed a reserve price of Rs 52 crore.

Several banks and non-banking financial companies (NBFCs) have reported a sharp rise in delinquencies in the microfinance segment, prompting them to sell off these bad loans to ARCs.