The stressed assets opportunity for ARCs is shifting from corporate to retail and MSME loans.

About a fourth of the restructured micro, small and medium enterprises (MSME) loans could slip into non-performing assets (NPA), the Associated Chambers of Commerce and Industry of India and Crisil Ratings said in a report. In the retail segment, the absolute quantum of bad loans may rise.  

This will provide opportunities for asset reconstruction companies (ARCs) to tap into the MSME and retail stressed assets even as corporate loans are at a cyclical low for them, the report said.

The asset quality of the financial sector is at its healthiest in recent times, specifically because of the sharp reduction in NPAs in corporate loans.

“That said, retail assets, which have garnered more interest from ARCs in the past couple of years, continue to offer a meaningful opportunity. As do loans to MSMEs,” the report said.

Led by the post-pandemic economic recovery and higher credit growth, Crisil expects the gross NPAs for banks to decline 90 basis points (bps) year-on-year (y-o-y) to about 5% this fiscal, and by another 100 bps to a decadal low of about 4% by March 31, 2024.

The biggest improvement will be in the corporate segment, where gross NPAs are seen falling below 2% next fiscal from a peak of about 16% as on 31 March 2018. The proposed sale of stressed assets to the newly formed National Asset Reconstruction Company Ltd (NARCL) should also support reduction in gross NPAs.

This follows significant clean-up of books by banks in recent years, as well as strengthened risk management and underwriting, which has led to higher preference for borrowers with better credit profiles

Gross NPAs in the MSME segment, which suffered the most during the pandemic, may rise to 10-11% by March 2024 from about 9.3% as on March 31, 2022.

“While relief measures did help contain asset quality deterioration last fiscal, the segment saw the most restructuring, at about 6%, compared with about 2% for the overall banking sector. About a fourth of the restructured accounts could slip into NPAs,” the report said.

The retail segment has maintained steady asset quality with gross NPAs expected to be rangebound at 1.8- 2% over the medium term

“While the impact of higher interest rates and inflation on cash flows of individual borrowers will need to be monitored, almost half of the retail loans are home loans, where borrowers that banks cater to have relatively better credit profiles.

“That said, segments such as unsecured loans may see some pressure. Also, while retail NPAs are expected to remain steady on a percentage basis, the absolute quantum of NPAs may rise given the sharp growth in the portfolio, thus providing opportunity for ARCs,” the report said.

Overall, this means there may be fewer opportunities for stressed asset players in the large corporate segment over the medium term. The MSME segment, however, continues to offer opportunities. On the retail side as well, certain segments, especially unsecured loans, could see more offers for sale.

“Between banks and NBFCs, the latter are becoming increasingly active as sellers, and this is expected to continue in the wake of the revised Income Recognition, Asset Classification and Provisioning (IRACP) norms.

“Nevertheless, it must be noted that over a longer period, asset quality is cyclical, and if the past is any indication, NPAs are expected to go up again after the current decline continues and they bottom out.” the report said.

As growth picks up and banks move out of their extremely cautious stance towards the corporate segment in recent years to meet credit demand and as leverage levels among borrowers go up, NPAs are likely to rise again, offering an opportunity for stressed assets players. The same holds true for NBFCs too, the report said.