New Delhi, Apr 4 (KNN) Asset reconstruction companies (ARCs) are expected to witness steady growth in assets under management (AUM) in FY27, driven by rising stress in MSME and retail loan segments amid ongoing geopolitical tensions in West Asia.
MSME Stress to Drive ARC Growth
Experts indicate that the ongoing conflict involving the United States, Israel, and Iran is likely to adversely impact MSMEs, particularly those exposed to global trade routes such as the Strait of Hormuz, reported Business Standard.
Disruptions in trade, coupled with volatility in commodity prices, are expected to weaken balance sheets of smaller businesses, thereby increasing distressed assets available for resolution by ARCs.
Retail and Unsecured Loans Add Momentum
In addition to MSMEs, retail and unsecured business loans are also likely to contribute to AUM growth, as stress in these segments persists.
While stress in microfinance portfolios may decline due to prior write-offs and asset sales, unsecured lending segments are expected to continue feeding assets into ARCs, sustaining growth momentum.
Interest Rate Risks and Inflation Pressures
The outlook is further shaped by concerns over rising inflation and potential interest rate hikes by the Reserve Bank of India, which could impact borrower repayment capacity and overall credit quality.
Higher borrowing costs and input price pressures may slow business growth and increase defaults, especially among smaller enterprises.
Moderate but Stable Growth Trajectory
ARCs’ AUM growth stood at around 6 percent in FY25 and is expected to remain at similar levels in FY26, with FY27 likely to sustain this trend.
However, the pool of assets from certain segments, such as microfinance institutions (MFIs), may decline as earlier stress has already been recognised and resolved.
Broader Economic Context
The West Asia conflict has heightened risks for the Indian economy by disrupting key trade routes, increasing energy and commodity prices and creating financial market volatility.
These factors are contributing to system-wide stress, particularly for MSMEs, which are more vulnerable compared to large corporations.
Overall, ARCs are expected to play a critical role in resolving emerging stress in the financial system, with AUM growth supported by rising delinquencies in MSME and retail segments. However, the trajectory will depend on the duration of geopolitical tensions and the domestic interest rate environment.
(KNN Bureau)
