Asset reconstruction companies are improving their technology and building partnerships with resolution agencies to service capital-intensive retail and micro, small and medium-sized enterprise loans.
“We are putting up an information technology platform, which we will be using on a subscription or a usage basis. It will have end-to-end seamless integration. If ARCs acquire retail and small ticket-size SME loans, they have to have a robust information technology system. They cannot use the same mechanism that they were using for servicing corporate loans,” said Pallav Mohapatra, MD and CEO, Asset Reconstruction Company (India).
Mohapatra said digitisation of collection “does not mean that the entire process is being digitised”.
“The field collection can either be done by our own resources or by outsourcing. I have come to the conclusion that it is not cost effective for ARCs to do everything in-house. So, why not engage resolution agencies who are in this field. That is more cost effective and you can expand your base without bothering about whether you have the branch outfits or not,” Mohapatra added.
The share of retail loans in overall debt acquired by ARCs has risen sharply in the last two years as bad loans in the corporate segment have been coming down since hitting their peak in 2018.
The composition of corporate loans in the overall debt acquired by ARCs has fallen to 68% in 2021-22(April-March) from 96% in 2018-19, credit rating agency CRISIL said in a recent report.
The market for retail stressed assets itself is getting more diversified. It was more concentrated towards secured assets classes such as home loans and loans against property a couple of years ago. But recent quarters have seen an increasing proportion of segments such as unsecured personal loans and microfinance loan, the report said.
Going ahead, the retail and MSME portfolio of ARCs is expected to grow at a compound annual growth rate of 10%.
“Primary difference in wholesale and retail loan portfolios is the volume and value. Retail portfolios consist of individual loans of small value but are voluminous as compared to wholesale loans and require a different approach altogether. Even within retail, there are many segments like secured and unsecured loans, vehicle loans and mortgage loans, which require different approaches and skill sets for resolution,” said Sanjay Agarwal, divisional head–retail assets business, Edelweiss ARC.
“What’s more, the criteria to settle and resolve are also not iron clad, and can be case specific. Each case has its own nuances and requires a customised solution,” he added.
The average ticket size of corporate loan is more than Rs 50 crore, retail is less than Rs 5 crore, whereas small and medium-sized enterprises is around Rs 5-15 crore.
Corporate lending in India is done through a consortium, hence, multiple lenders are involved. But it is just a single lender for retail and MSME loans. So, inter-creditor issues are a bigger challenge as far as corporate loans are concerned, a senior official at a domestic ARC said.
However, the operating expenditure to service retail loans manually is typically 10-15 times higher than corporate loans.
Hence, ARCs are exploring alternatives to setting up fully staffed in-house teams for resolution of retail assets, including using external agencies and also setting up servicing arrangements with selling institutions, say experts.
“In the initial years, the dependence on external resolution agencies would be a bit higher because it takes some time to ARCs to have their feet on the ground and build capacity,” said Hari Hara Mishra, director, UV Asset Reconstruction.
“In the interim period, a large part of the servicing has to be outsourced especially in Tier-3 cities and below. Meanwhile, these ARCs would have to ensure that the arrangement with the resolution agency is success-fee based. Only then will revenue optimisation happen,” he added.