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ARCs may hunt stressed MSME, retail assets once National Asset Reconstruction Company materialises: Crisil

msme 1The rating agency noted that ARCs have been facing headwinds in the past two fiscals, with assets under management (AUM) – as measured by security receipts (SRs) outstanding – contracting after a strong run-up in the previous five. (Express File/Gurmeet Singh)

Ease of Doing Business for MSMEs: Lack of access to funding and setting up of the National Asset Reconstruction Company Ltd (NARCL) ahead may push asset reconstruction companies (ARCs) to hunt stressed accounts in the micro, small, and medium enterprise (MSME) and retail segments, Crisil Ratings said on Monday. The rating agency noted that ARCs have been facing headwinds in the past two fiscals, with assets under management (AUM) – as measured by security receipts (SRs) outstanding – contracting after a strong run-up in the previous five. While for the FY15-FY19 period, their AUM had grown steadily on supportive regulations introduced in FY14, however that trend was reversed in FY20 with around 4 per cent contraction. In FY21 as well, AUM contracted by around 1 per cent to Rs 1.07 lakh crore, as per the agency’s estimates.

“The National ARC, given its stated mandate and access to capital, is expected to dominate the large corporate segment. Mid-corporate assets, where ARCs have a relatively better recovery track record, could be a play for them as well as for stressed assets funds,” said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings in a statement. However, in the retail and MSME segments, ARCs have the opportunity to create niches, he added. According to Sitaraman, these segments need an operationally intensive set-up that other investor classes are unlikely to be interested in creating.

Importantly, Finance Minister Nirmala Sitharaman in her Budget speech for 2021-22 had announced setting up an Asset Reconstruction Company Limited and Asset Management Company as the “high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books.”

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Volumes in the retail and MSME segments are unlikely to match those seen between FY14 and FY2019 — a period of growth led by corporate assets, the agency added. “Nevertheless, for ARCs that get it right, it can be a profitable business. Growth remains fundamentally dependent on their ability to attract capital. Given that capital is expected to really flow towards the platform that is the most effective, it will be critical for ARCs to demonstrate their differentiated recovery ability in order to remain relevant to stakeholders.”

“ARCs have yet to demonstrate their recovery capability in the retail segment at a material scale. However, one factor will support their shift towards retail and MSME segments — it is the opportunity in the form of incremental non-performing assets coming largely from these two segments in the current cycle, with lenders, including non-banks, increasingly putting these assets up for sale,” said Subha Sri Narayanan, Director, CRISIL Ratings. This shift is already visible as although the overall volume of debt acquired was lower in FY21, a CRISIL Ratings study showed non-corporate segments formed a 44 per cent share, which is a stark increase from 4 per cent two years back, he added.

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