Asset Reconstruction Companies (ARCs), long associated with resolving large corporate bad loans clogging India’s banking system, are rapidly recalibrating their strategy towards retail and SME loans given elevated distress levels.
A prolonged clean-up of corporate balance sheets, competition from the government-backed so-called bad bank, and the sharp rise in stress within unsecured retail and small-business lending have together pushed ARCs into the non-corporate bad debt segment.
The shift is clearly visible in the numbers of leading ARCs - with retail and SME loans increasingly occupying a larger share of their assets under management compared to previous years.
IPO-bound Asset Reconstruction Company (India) Limited (ARCIL), the country’s oldest ARC, has seen retail and SME assets rise to nearly 25 percent of its AUM as of FY25, from 17 percent in FY23, marking a significant departure from its historically corporate-heavy portfolio.
The company’s DRHP shows that stressed retail loan of banks and NBFCs nearly doubled from Rs 3.47 trillion in FY20 to Rs 6.92 trillion in FY25, a CAGR of 14.8 percent.
ARCIL, too, has aggressively scaled its retail book, with retail AUM rising from Rs 1,559.1 crore in FY23 to Rs 2,747.9 crore in FY25 at a CAGR of 20.79 percent.
“We have focused on increasing the proportion of retail loans in our portfolio,” ARCIL said in its draft IPO papers, adding that the stressed assets opportunity is shifting from corporate to non-corporate loans with the retail segment in particular experiencing rising stress levels.
Edelweiss ARC, India’s largest, has articulated a similar shift. In its latest annual report, the ARC said:
“In alignment with prevailing industry trends and regulatory guidance, the Edelweiss ARC has its focus on retail asset acquisition and resolution to enhance portfolio granularity, diversify geographically, and strengthen cash flow stability. This strategic emphasis is critical given the evolving credit environment, where retail loans are witnessing increased stress.”
Going forward, the retail division’s share of the overall portfolio is expected to increase from 18 percent as of March 31, 2025, to 40 percent over the medium term, Edelweiss ARC noted in its annual report.
Recurring cash flows vs. lumpy corporate recoveries
Retail and SME assets have become attractive because they provide steady cash flow as against corporate loans where recoveries are lumpy in nature.
“The proportion of retail in the overall stressed-asset supply will rise. What helps in retail is the faster rate of recovery. The challenge is scaling up the network to support those recoveries effectively. If that challenge is addressed by building a strong distribution and recovery infrastructure, then it becomes a good business to be in. Retail offers steady recovery cash flows, which balances the lumpiness of corporate recoveries," said Srinivasan V, MD & CEO, JM Financial Asset Reconstruction Company Limited.
It’s always beneficial for an ARC to have a mix of both, he added.
Retail stress
India’s retail loan segment has been experiencing a deterioration in asset quality in the past few years, particularly in unsecured portfolios.
According to CRISIL Intelligence estimates, overall NPA under the retail segment touched Rs 1.5 trillion as of March 2025. It expects retail NPAs to rise further due to persistent strain in unsecured consumer loans, personal loans and credit cards.
Between FY20 and FY25, personal loan stress rose at a CAGR of 26.9 percent, stressed credit cards rose at 29.1 percent while stressed consumer loan stress rose at 16.5 percent, as per CRISIL Intelligence.
A significant driver is the over-leveraging of low-income borrowers, many of whom hold multiple unsecured loans alongside larger housing or vehicle loans. A default in a small-ticket loan triggers classification of all other loans of that borrower as NPAs, magnifying stress.
NBFC-originated retail, SME stress feeding ARC pipelines
According to Jatin Nanaware, Senior Director and Head – Structured Finance at India Ratings & Research, the nature of retail stress also depends on the originating lender
“Banks typically cater to prime customers, while smaller NBFCs, because of their higher cost of borrowing, operate in high-IRR segments. Mid and small NBFCs with a presence in unsecured business loans and the micro-LAP segment have been seeing stress for some time,” he said.
These NBFC portfolios such as unsecured business loans, micro-LAP, personal loans, MFIs, have become a major source of assets for ARCs.
“Earlier, banks were the main suppliers of assets to ARCs, but over the last three to four years, housing finance companies and NBFCs have also started selling down their books,” said Nanaware.
Experts added that the SME and micro-LAP segments, typically Rs 8–10 lakh loans, are a significant source of supply for ARCs.
According to Pankaj Naik, Director at India Ratings & Research, “Stress in unsecured business loans has been visible for the last 18 months, and without collateral support, recovery rates have remained low. Monoline NBFCs which are dependent on a single product, have particularly faced asset-quality pressures.”
He added that recoveries in micro-LAP remain challenging because property markets in semi-urban/rural regions are illiquid, and borrower cash flows remain volatile. This leads NBFCs to sell off these bad loans to ARCs.
Microfinance (MFI) distress has also led to a surge in MFI portfolios being sold to ARCs.
“Over the last two years, many MFI portfolios have been sold. The challenge is that, unlike secured assets, tracing the borrower and building recovery infrastructure takes time,” said Nanaware.
Experts pointed out that ARCs have spent the last few years building these capabilities, including on-ground collection teams, partnerships with fintech recovery firms, and borrower-contact databases.
“Most ARCs still don’t have a full national footprint, but they are confident that even in the unsecured space, with the help of tie-ups with local agencies, they can reach borrowers in smaller towns. ARCs are increasing headcount and strengthening their recovery infrastructure. Different ARCs will have different comfort levels in unsecured portfolios depending on the networks they have built," said Srinivasan V of JM Financial Asset Reconstruction Company.
Corporate stress declines, NARCL intensifies competition
The pivot to retail is also a function of shrinking opportunities in the corporate bad-loan market.
“Traditionally, ARCs focused on large corporate loans. With NARCL (National Asset Reconstruction Company Limited) now acquiring many of the bigger exposures, ARCs are increasingly trying to strike a balance between retail and corporate assets,” said Nanaware.
JM's Srinivasan added that, he expects this supply of stressed retail and SME assets to continue for at least the next few quarters. "On the corporate side, while banks have reported lower NPAs, there is still a large pool of technically written-off loans, and that can increase the flow of corporate assets to the market as well," he said.
As NBFC and bank balance sheets expand, the absolute pool of stressed retail assets being offloaded is also rising.
“As NBFC and bank balance sheets expand, the absolute pool of assets available for sale has increased. In the 12–18 months, there has been a noticeable pick-up in retail asset acquisitions. Rather than waiting for sporadic, lumpy recoveries from large corporate cases, it makes sense for ARCs to diversify, provided the economics work,” added Nanaware.
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