Ease of Doing Business for MSMEs: Lack of access to funding and setting up of the National Asset Reconstruction Company Ltd (NARCL) ahead may perhaps push asset reconstruction organizations (ARCs) to hunt stressed accounts in the micro, modest, and medium enterprise (MSME) and retail segments, Crisil Ratings stated on Monday. The rating agency noted that ARCs have been facing headwinds in the previous two fiscals, with assets below management (AUM) – as measured by safety receipts (SRs) outstanding – contracting right after a sturdy run-up in the prior 5. While for the FY15-FY19 period, their AUM had grown steadily on supportive regulations introduced in FY14, nonetheless that trend was reversed in FY20 with about 4 per cent contraction. In FY21 as nicely, AUM contracted by about 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,” stated Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings in a statement. However, in the retail and MSME segments, ARCs have the chance to produce niches, he added. According to Sitaraman, these segments want an operationally intensive set-up that other investor classes are unlikely to be interested in building.
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 these seen among FY14 and FY2019 — a period of development 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,” stated Subha Sri Narayanan, Director, CRISIL Ratings. This shift is currently visible as despite the fact that the general volume of debt acquired was decrease in FY21, a CRISIL Ratings study showed non-corporate segments formed a 44 per cent share, which is a stark boost from 4 per cent two years back, he added.