The business models of ARCs are undergoing a makeover
With stress in lenders’ corporate loan book coming down, asset reconstruction companies (ARCs) are gearing up their operations towards acquiring and resolving stressed retail loans.
This move is in anticipation of the ripple effect that sour loans in the unsecured personal loan portfolio can have on the secured loan book.
Hari Hara Mishra, CEO, Association of ARCs in India (AARCI), said: “ARCs are looking forward to new opportunities in the retail segment, with 21 out of 27 ARCs already handling retail NPAs (non-performing assets).
“The business models of ARCs are undergoing a quiet makeover towards retail in terms of manpower, technology and alliances with service providers.”
CRISIL Intelligence, in its industry study for ARCIL’s upcoming initial public offer, noted that lower corporate NPAs have propelled the downward trend in scheduled commercial banks’ (SCBs’) gross NPAs.
The GNPA levels of large borrowers (with aggregate exposure of ₹5 crore and above) in SCBs declined significantly from 14.3 per cent in FY2019 to 3 per cent in FY 2024.
The study forecast that overall GNPA levels of SCBs are set to witness a calibrated rise in FY2026.
The report underscored that stress in unsecured lending segment, comprising consumer loans, personal loans, and credit cards, has witnessed a rapid growth, with a CAGR (compounded annual growth rate) of 16.5 per cent, 26.9 per cent and 29.1 per cent respectively, between FY2020 and 2025.
This growth has been driven, in part, due to overleveraging by low-income borrowers, who took multiple unsecured loans, per the report. As a result, the segment’s vulnerability to defaults and delinquencies has increased.
Retail NPAs may rise
The overall NPA under retail segment was about ₹1.5 lakh crore as of March 31, 2025. Stress in the retail segment has been increasing in the last few years mainly due to the unsecured lending segment.
“Many borrowers availing credit cards and personal loans also have another live retail loan outstanding, which are often high-ticket loans (that is housing and/or vehicle loan).
“When any loan account of a borrower in a bank/FI becomes an NPA, all other loans (even if standard) of that borrower will also be classified as non-performing by that bank/FI,” the study said.
So, larger, secured loans of a borrower can also face delinquency risks due to defaults in smaller personal loans.
CRISIL Intelligence expects retail NPAs to witness some rise, primarily due to increasing NPAs under unsecured segments.
AARCI’s Mishra underscored that in the last five years, the composition of bank loans has undergone significant change, with personal loans growing over three times as compared to growth in industry loans. Now, personal loans constitute the largest segment of loans.
“Acquisition of stressed retail loans last year was only 15 per cent of the security receipts (SRs) issued by ARCs. This proportion is likely to go up as corporate loans shrink and retail stressed loan acquisition grow,” he said.
Unlike stressed corporate loans, where cashflows on account of recovery action are back-ended, Mishra opined that recovery from stressed retail loans such as housing will result in greater certainty and regularity in terms of cash flows for ARCs.
Published on August 4, 2025
