ARCs open to acquiring non-performing MFI loans, but only at right price

With increasing stress in the microfinance institution (MFI) segment and banks looking to offload non-performing portfolios, asset reconstruction companies (ARCs) believe these assets hold limited value. However, these loans could be worth acquiring if sold at the right price, particularly on a cash-to-security receipts (SRs) basis rather than a full cash basis.

 

Industry-wide stress in the microfinance sector has built up due to unchecked credit growth and multiple loan disbursements to the same customers, resulting in overleveraging among borrowers.

 

As delinquencies rise, major banks and microfinance-focused non-banking financial companies (NBFCs) are selling off non-performing loans. Recently, IndusInd Bank invited bids from ARCs to offload Rs 1,573 crore of non-performing microfinance retail loans from over a million accounts. The bank has invited bids on a full cash basis (100 per cent cash basis) and set a reserve price of Rs 85 crore, translating into a recovery of 5.04 per cent for the bank.

 

 

In November, Ujjivan Small Finance Bank put on the block Rs 270 crore worth of non-performing microfinance loans. Similarly, Utkarsh Small Finance Bank is looking to sell Rs 355 crore worth of such loans, setting a reserve price of Rs 52 crore, which equates to a recovery rate of 14.64 per cent.

 

According to industry insiders, despite the stress in the microfinance industry, there will likely be demand for these portfolios, provided the price is right. They believe there could be interest from potential buyers if banks sell the loan pool at 10 per cent of the outstanding book value.

 

“If banks opt to sell these loans on a 100 per cent cash basis, ARCs would need to handle the collections themselves, incurring substantial costs. Ideally, lenders should consider offering these portfolios on a cash-to-SR basis, as this approach benefits both parties,” said the chief executive officer (CEO) of a private sector ARC.

 

Currently, they would not be interested in microfinance portfolios if offered on a full cash basis, the CEO said. However, if these portfolios are offered on a cash-to-SR basis, they may still consider acquiring them. 

 

According to Pallav Mohapatra, managing director (MD) and CEO of Asset Reconstruction Company (India) Ltd (ARCIL), ARCs would only consider acquiring microfinance portfolios at the right price -- not more than 10 per cent of the outstanding loans.

 

“If the responsibility for collections remains with the bank, the saleability of these portfolios increases. ARCs lack the infrastructure to recover unsecured loans in rural areas. If ARCs are tasked with collections, the recoverability will come down sharply,” Mohapatra said.

 

While ARCs have expertise in recovering corporate loans, they lack resources to effectively recover retail loans, especially unsecured ones. Most ARCs rely on third-party agents for such recoveries, but that involves challenges, including high costs and regulatory violations.

 

That said, with banking sector NPAs at multi-decade lows, corporate deleveraging underway, and the entry of state-owned NARCL to acquire and resolve legacy NPAs of banks, private-sector ARCs are shifting their focus towards acquiring more retail NPAs, with an emphasis on secured retail pools.

 

“While ARCs have been making efforts to be a one-stop holistic solution provider for stressed assets across segments, there are challenges in the acquisition of microfinance portfolios, such as ensuring know-your-customer compliance in respect of these accounts,” said Hari Hara Mishra, CEO, Association of ARCs in India.

 

Other challenges include pricing portfolios with limited borrower data, and servicing such a large number of accounts across geographies. “However, with time, models using advanced technology and artificial intelligence will be used for predictive analytics, improving contactability and ensuring compliance,” Mishra said.