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Shifting Focus of Asset Reconstruction Companies (ARCs) Towards Retail Loan Acquisition
Context:
ARCs are shifting focus from wholesale distressed assets to retail distressed assets. The wholesale segment stress has decreased in recent years, leading to this strategic shift. ARCs are preparing for an upcoming retail Non-Performing Asset (NPA) cycle.
Performance in Acquisitions and Recoveries for the Current Year
- Acquisitions have significantly improved compared to the previous year.
- Recovery performance remains in line with last year’s performance.
- Acquisition target for the year: ₹23,500 crore.
- Recovery target for the year: ₹22,600 crore.
- The acquisition target is likely to be exceeded by the end of the financial year.
Target Areas for Loan Acquisition by ARCs
- Unsecured Retail Loans: Emerging as a key segment for acquisition.
- Microfinance Loans: Witnessing rising stress, but risk appetite remains low among ARCs.
Sources of Retail Loan Portfolios for ARCs
- Non-Banking Financial Companies (NBFCs): Leading source of secured retail portfolios and unsecured loans.
Corporate Portfolio Sales: Why NBFCs Lead Over Banks
- Banks’ Low Exposure: Banks have limited exposure to real estate portfolios.
- Regulatory Restrictions: Banks are not permitted to finance land acquisitions, reducing their stress in real estate.
- NBFCs’ Higher Involvement: NBFCs have greater exposure to real estate financing, making them the primary sellers of distressed real estate portfolios.
- Banks: Have not actively sold unsecured retail loans yet but are expected to do so in the future.
- Small Private Sector Banks: Engaged in selling secured retail loans.
- Micro, Small, and Medium Enterprises (MSME) Portfolios: Put up for sale by NBFCs and select banks.
Sectoral Analysis: Real Estate and Microfinance Institutions (MFIs)
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Real Estate Sector
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- Banks’ exposure is minimal due to regulatory constraints.
- NBFCs face stress as they finance land acquisition and development.
- Opportunities exist in distressed real estate portfolios held by NBFCs.
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Microfinance Institutions (MFIs)
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- Increasing stress in the sector due to the unsecured nature of loans.
- Limited participation by ARCs due to lack of expertise in microfinance underwriting.
- The gap between seller expectations and ARC’s willingness to pay remains a challenge.
Challenges in Retail Loan Acquisition for ARCs
- High Volume, Low-Ticket Loans: Unlike corporate portfolios, retail portfolios involve lakhs of small-ticket accounts.
- Technology Requirements: Manual management is not feasible; ARCs need strong IT platforms for processing retail NPAs.
- Branch Infrastructure: Retail-focused ARCs need physical branches to handle recoveries.
- Regulatory and Compliance Costs: Higher compliance costs compared to wholesale NPAs.
Future Targets and Requirements for ARC Growth
- Expansion Plans: ARCs aim to double or triple their business by 2029-30.
- Targeted Assets Under Management (AUM): Expected to reach ₹24,000-25,000 crore.
- Capital Requirements: ARCs will need additional capital infusion to meet infrastructure and technology needs.
- Capability Building: Investment in knowledge and expertise for managing microfinance and unsecured retail loans.
