Microfinance Institution (MFI) Sector Stress and Asset Reconstruction Companies (ARCs)

The microfinance sector is experiencing significant stress due to unchecked credit growth and borrowers' overleveraging, leading to increased delinquencies. This situation has prompted banks and microfinance-focused NBFCs to sell non-performing loans, creating opportunities for ARCs.

Opportunities for ARCs

• ARCs see potential value in acquiring non-performing loans, especially if sold on a cash-to-security receipts (SRs) basis.
• IndusInd Bank has invited bids for Rs 1,573 crore of non-performing microfinance loans, aiming for a 5.04% recovery rate.
• Ujjivan Small Finance Bank and Utkarsh Small Finance Bank are also selling non-performing loans with targeted recovery rates of 14.64%.

Challenges and Considerations

• ARCs would consider acquiring portfolios if the selling price is not more than 10% of the outstanding loans.
• If collections remain with the banks, the saleability of portfolios increases, as ARCs lack infrastructure for recovering unsecured loans in rural areas.
• ARCs predominantly use third-party agents for recoveries, which poses challenges like high costs and potential regulatory violations.

Shift in ARC Focus

• With banking sector NPAs at historical lows, ARCs are focusing more on retail NPAs, particularly secured retail pools.
• Challenges in acquiring microfinance portfolios include ensuring compliance, limited borrower data, and servicing numerous accounts.

Future Directions

• Advanced technology and artificial intelligence are expected to enhance predictive analytics and compliance in the future.