Global Economy

ARCs may hunt MSME, retail assets as ground shifts: Crisil

Asset reconstruction companies (ARCs) are expected to circle stressed accounts in the micro, small and medium enterprises (MSME) and retail segments in the near-to-medium term, given the twin challenges of inadequate funding access and intensifying competition once the proposed bad bank materialises, rating agency said on Monday.

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, as per it’s analysis.

Between fiscals 2015 and 2019, their AUM had expanded steadily on supportive regulations introduced in fiscal 2014. But that trend then reversed in fiscal 2020 with nearly 4% contraction.

In fiscal 2021, too, as per CRISIL Ratings estimates, AUM contracted by roughly 1% to Rs 1.07 lakh crore

While the slowdown is partly attributable to the general macro environment, which has hindered consummation of deals and heightened risk aversion among investors, a few structural trends are also at play.

“First, banks prefer to retain only a limited share of SRs for assets sold due to the stringent provisioning norms for selling banks on holding these,” the agency noted. “On the other hand, ARCs in most cases hold only the regulator-mandated 15% of SRs. This results in a gap that has to be bridged either by the ARCs holding a larger proportion of SRs or by attracting external co-investors.”

This marks a significant shift from the past where till fiscal 2018, almost all the SRs were subscribed to by either the selling institutions or the ARCs.

Second, in contrast to the situation a couple of years back, lenders now have multiple options for resolution and enforcement frameworks, and are also more actively evaluating and utilising these options, Crisil noted.

Against this backdrop, CRISIL Ratings believes the stressed assets space will see segmentation, with players having different focus areas. Availability of capital, debt aggregation capability and operational infrastructure will define the positioning of each player.

“The National ARC, given its stated mandate and access to capital, is expected to dominate the large corporate segment,” said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings.

“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. In the retail and MSME segments, however, ARCs have the opportunity to create niches. These segments need an operationally intensive set-up that other investor classes are unlikely to be interested in creating.”


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