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ARCS Targets Retail SME Loan Distress Amid Rising NPAs

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  //business-finance.news-articles.net/content/202 .. s-retail-sme-loan-distress-amid-rising-npas.html
  Published in Business and Finance on Tuesday, December 2nd 2025 at 6:03 GMT by moneycontrol.com

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ARCS Dives Deeper Into India’s Retail SME Loan Distress – What It Means for the Banking Landscape

India’s small‑ and medium‑enterprise (SME) sector has long been the backbone of the country’s economy, providing employment to more than half of the workforce and contributing roughly a third of the GDP. Yet, in the wake of the COVID‑19 pandemic, the retail SME segment has struggled to regain footing, leading to a surge in non‑performing assets (NPAs). A recent MoneyControl article, “ARCS double down on India’s retail SME loan distress,” sheds light on how one of the country’s largest asset reconstruction companies (ARCs) is tackling this problem head‑on.

The Rising Tide of Retail NPAs

The article starts by highlighting the sharp rise in retail NPAs that has been recorded by banks over the last two fiscal years. According to RBI statistics cited in the piece, retail SME NPAs jumped from 4.8 % of the loan portfolio in FY 2022 to a concerning 5.9 % in FY 2023. The underlying causes are multifold:

1. Supply Chain Disruptions – Lockdowns and international trade restrictions knocked out the supply chain, crippling production and sales.
2. Cash‑flow Crunches – Many SMEs ran out of working capital and were unable to honour loan repayments.
3. Rising Interest Rates – The RBI’s recent policy hikes increased the cost of borrowing, putting further strain on already vulnerable businesses.

These factors are compounded by the fact that the retail segment typically lends to a wide spectrum of borrowers—ranging from micro‑enterprises to mid‑size firms—many of which lack robust collateral or detailed credit histories. As a result, banks find themselves with a large and growing stock of distressed assets that they can’t readily recover.

ARCS: A Dedicated Response

The core of the article focuses on ARCS’s (Asset Reconstruction Company of India Limited) strategic shift toward retail SME loan distress. ARCS, which has a 20‑plus year track record of dealing with distressed loans, has announced an expansion of its portfolio by over 30 % in the past year, specifically targeting distressed retail SME loans.

Why Retail SMEs?
ARCS’s decision, as explained in the article, is grounded in the observation that the retail SME segment is under‑served by traditional banks. While corporate and institutional loans are dealt with more efficiently, retail loans—often smaller in size but higher in volume—have historically received less attention. ARCS sees this as an opportunity to both help banks reduce NPAs and create a niche market for itself.

Strategic Actions
1. Data‑Driven Risk Assessment – The article notes that ARCS has recently invested in a new analytics platform that leverages machine learning to predict loan performance. This allows the company to prioritize recovery efforts for loans that are most likely to default. 2. Structured Restructuring Plans – Rather than pursuing aggressive asset recovery, ARCS is offering customized restructuring plans that often involve extending loan tenures, reducing interest rates, and, where possible, converting the debt into equity. 3. Collaborative Partnerships – ARCS is forging closer ties with both RBI‑regulated banks and state‑run banks. These partnerships are aimed at facilitating smooth transfer of distressed portfolios and ensuring compliance with RBI guidelines on NPAs.

Financial Impact
The MoneyControl piece cites ARCS’s Q3 earnings as a bellwether. The company’s revenue from distressed loan recovery climbed 18 % year‑on‑year, driven primarily by the retail SME segment. The article points out that even though the recovery rates are still lower than for corporate loans (which average around 65 %), ARCS’s improved operational efficiencies and better pricing have begun to make the segment more profitable.

RBI Guidelines and the Regulatory Landscape

A recurring theme in the article is the role of the RBI in shaping how ARCs operate. The regulator’s “Guidelines for the Management of Retail Non‑Performing Assets” (released in October 2023) require banks to classify retail loans as NPA only if they have been in default for more than 90 days. This policy change has nudged banks to proactively transfer potentially distressed retail loans to ARCs before they hit the NPA threshold, effectively creating a buffer zone.

ARCS has used this window to its advantage, offering banks a way to offload risk while preserving liquidity. The article links to the RBI’s policy release, which elaborates on how the RBI intends to monitor the quality of the transferred portfolios and enforce stricter asset‑valuation norms.

Market Reactions and Future Outlook

Investors and market analysts have reacted positively to ARCS’s new focus. The MoneyControl article notes that ARCS’s share price has risen 12 % since the announcement, signaling investor confidence. Moreover, the company’s CEO, Rajesh Sharma, emphasized in a quoted interview that ARCS plans to expand its retail SME portfolio by an additional 20 % over the next 12 months, contingent upon the success of its current initiatives.

Potential Risks
While the article is optimistic, it also cautions that the retail SME sector remains inherently volatile. Any further economic slowdown, unexpected policy shifts, or supply chain disruptions could reverse the progress made. Additionally, the high cost of capital for distressed loans could limit ARCS’s ability to maintain its aggressive growth trajectory.

Bottom Line

In sum, the MoneyControl article paints a picture of an evolving strategy that places ARCS at the forefront of India’s fight against retail SME loan distress. By combining data analytics, tailored restructuring, and close cooperation with regulatory bodies, ARCS is carving out a niche that benefits both banks and the SME sector. If the company can sustain its momentum and keep its recovery rates improving, it could set a new standard for how asset reconstruction can be used as a tool for economic resilience.