The asset reconstruction company (ARC) segment may see some consolidation going ahead, especially if the guidelines for the higher net owned fund requirement are implemented, Crisil Ratings said in a recent report.
In October 2022, RBI asked ARCs to increase their net owned funds to 200 crore by March 2024 and 300 crore by March 2025. While two ARCs have surrendered their licence following release of norms, around 40% are still below the RBI’s threshold, the report said.
“If the guideline for higher NOF requirement is implemented, it may lead to consolidation, as small ARCs may find it difficult to raise capital to fulfill this criteria,” the report said, adding that big ARCs will grab a larger share of the stressed assets pie going ahead.
The assets under management of the ARC industry grew 17% in 2022-23(April-March) driven by a large transaction of stressed assets being acquired from a bank by an asset reconstruction company. Excluding this single transaction, the growth was a mere 7%.
While the market for stressed assets was more concentrated on secured asset classes like home loans and loan against property, the proportion of unsecured personal loans and microfinance loans has been on the uptrend in recent years. However, the overall proportion of secured assets continues to form a sizeable component of retail security receipts issued.
Crisil Ratings feels that ARCs will have a competitive edge in retail and MSME loans. This is because other investor classes such as stressed assets funds are unlikely to be interested in these segments, as building an operationally intensive set-up, to manage retail stressed assets, will entail major investment.
Given the greater operating expenditure required, volume will be critical to profitability, the report said.
Broadly, the rating agency expects the industry to grow at 8-9% in 2023-24 and 5-6% in 2024-25. This will largely be driven by high acquisitions. The acquisitions by National Asset Reconstruction Company are also expected to gather pace going ahead, supporting the overall industry.