India Ratings and Research (Ind-Ra) believes India’s retail asset reconstruction companies (ARC) market has witnessed a phase of accelerated growth and structural evolution, led by rising retail flows of non-performing loans (NPLs) from non-banking finance companies (NBFCs) and an increase in the sale of relatively early-stage delinquent retail loans. The agency has observed an increase in retail portfolio sales of micro-loan against property (micro-LAP) and unsecured business loans (UBL) to ARCs, amid early signs of stress seen in these segments during FY25-FY26.

Ind-Ra opines evolving geopolitical and macroeconomic uncertainties could impact performance of certain segment of the micro, small, and medium enterprises (MSME), rural and semi-urban borrower elevated through FY27, potentially sustaining retail NPL flows to ARCs. While recoveries remain asset-class dependent, Ind-Ra expects technology adoption and servicing capabilities to play a crucial role in differentiating ARC performance.

“Retail ARC activity remains robust, with cumulative security receipt (SR) issuances rising 17.7% to INR572 billion as of 9MFY26, reflecting sustained supply of retail stressed assets. While NBFCs have dominated retail ARC supply over FY21-FY25, with the implementation of expected credit loss (ECL)-linked provisioning frameworks, the extent of any structural shifts in the retail NPL sale behaviour by banks to ARCs would be closely monitored,” says Jatin Nanaware, Senior Director, Structured Finance.

Stable Recoveries for Large-ticket Mortgage NPLs: Recoveries in large-ticket mortgage pools continue to remain relatively stable over the long term, supported by stronger collateral quality. Average recoveries in this segment have ranged around 60%-63% of principal dues over a five-year period following transfer to ARCs. Recoveries over the past five years have broadly remained in line with internal recovery expectations. However, vintages impacted by COVID-19 underperformed projections by 20%-30%, as their peak recovery phase coincided with the pandemic COVID-19 disruptions. This highlights the sensitivity of secured recoveries to macroeconomic disruptions during peak collateral monetisation phases. Hence, the impact of the ongoing Middle East conflict on the recovery shall be monitored.

Affordable Housing and Micro-LAP Pools Slower Recoveries; Still in Early Recovery Cycle: In contrast to large-ticket pools,micro-LAP and affordable housing pools are witnessing slower initial recoveries of 10%-15% within the first two years. Ind-Ra expects the initial recoveries in this segment to remain relatively slower, as Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI)-led enforcement typically begins only after transfers to ARCs, due to threshold-related limitations for NBFCs. Long-term recovery trends for this segment are likely to emerge only after further seasoning. While transfer to ARCs enables SARFAESI recourse, enforcement is largely used as a pressure mechanism, with settlements typically is the preferred resolution pathway. Ind-Ra expects recovery trajectories to remain monitorable amid evolving geopolitical risks and borrower stress, particularly in the MSME-linked segments.

Servicing Capability Is Emerging as a Key Differentiator for Vehicle Loan Recoveries: Vehicle loan transfer to ARCs and recoveries have also moderated in recent years despite rising acquisition pricing. Recoveries from written-off vehicle loan pools have moderated to ~30%-35% over 2022-2025 compared to the historical average of nearly 50%. At the same, the pricing of vehicle NPL pools sold to ARCs witnessed an uptick of 8%-0% during FY25-FY26, largely driven by lower delinquency seasoning and the expectation of stronger recovery in early-stage stressed accounts. Ind-Ra partly attributes the moderation partly to operational challenges in repossession and an increase in dependence on servicing effectiveness. The agency noted that servicing capability is emerging as a key differentiator in retail ARC recoveries, especially for vehicle loan and cash-acquired pools.

Pricing for Unsecured Segment Remain Conservative: On an average, unsecured pools continue to be priced conservatively (below 20% of principal). The recovery across unsecured retail pools remains uneven, with variability ranging at 5%-29%. Highly delinquent pools exhibit lower recoveries.  

ARCs Expected to Remain Selective on Retail Acquisitions: Despite increasing retail NPL availability, ARCs are expected to remain selective in acquisitions amid rising recovery volatility across asset classes, evolving borrower stress patterns and uncertain macroeconomic conditions.

Technology and Scale Could Become Key Differentiators in Retail Recoveries: Several larger ARCs have started investing in technology platforms and artificial intelligence (AI)-led analytics capabilities to manage the growing scale and granularity of retail distressed assets. Ind-Ra believes the adoption remains at a relatively nascent stage. However, the agency believes ARCs investing in analytics, AI-led collection strategies and scalable platforms will be better positioned to navigate rising portfolio granularity and recovery volatility over the medium term.