The assets under management (AUM) of private asset reconstruction companies (ARCs), as measured by security receipts (SRs) outstanding, is expected to de-grow by 7-10 per cent in FY25 as acquisitions will trend lower, while redemptions, which have strengthened in recent years, are likely to remain healthy, CRISIL Ratings said.
The credit rating agency estimates private ARC (excluding National Asset Reconstruction Company Ltd) AUM at ₹1.2-1.25 lakh crore by the end of fiscal 2025, down from ₹1.35 lakh crore the previous fiscal.
Ajit Velonie, Senior Director, CRISIL Ratings, said: “Acquisitions by private ARCs are estimated to slow down in fiscal 2025, from an average of ₹30,700 crore SRs issued annually for the past three years, mainly due to two reasons.
“One, limited fresh opportunity in the corporate segment, with gross non-performing assets (NPAs) at a multi-year low of sub-2 per cent as on March 31, 2024. Two, retail acquisitions may not see a sharp rebound in fiscal 2025 after slowing in fiscal 2024 because opportunities remain moderate given the controlled retail NPAs in the system thus far.”
To be sure, there is a sizeable opportunity in the existing stock of stressed corporate assets, with banks having written off over ₹13 lakh crore (does not factor in recovery at a later stage) NPAs between fiscals 2018 and 2024, CRISIL Ratings said.
Government-backed ARC
However, private ARCs may not be very competitive in this segment, given the presence of the newly set up government-backed ARC, which has a mandate to resolve such assets supported by its unique guarantee-backed security receipt model.
Additionally, private ARCs are more focused on more recent NPAs, given the legal- and enforcement-related challenges in older assets. On the retail assets side, the intensity of the resolution process has increased significantly.
That said, CRISIL Ratings believes ARCs will continue to tap both corporate and retail assets, based on opportunity and value. Fiscal 2024 saw a rise in the share of corporate debt acquired (book value of debt acquired, including MSME debt), with ARCs taking over a few special-mention accounts and cash flow generating corporate assets that are more recent.
The better quality of acquisitions was also reflected in discount rates falling to 55 per cent in fiscal 2024 from 80 per cent in fiscal 2023, given the nature and vintage of assets, the agency said.
Redemption rate
“Apart from the quantum of acquisitions, what also impacts AUM growth is the rate of SR redemption. Fiscal 2024 was the first time when SR redemptions of private ARCs were similar to SR issuances, resulting in a flattish AUM. Private ARCs saw their highest level of SR redemption, at over ₹31,000 crore, against ₹27,000 crore in fiscal 2023,” as per the agency’s assessment.
An analysis of private ARCs rated by CRISIL Ratings indicates better recoveries for recent acquisitions. In fact, 47 per cent of SRs issued in fiscal 2022 were already redeemed within two years — that is by March 2024. This contrasts with earlier periods — for acquisitions between fiscals 2016 and 2018, the redemption range was 8-28 per cent in a two-year period.
Subha Sri Narayanan, Director, CRISIL Ratings, said, “The faster recoveries in recent years can be attributed to a combination of factors: better quality of assets in recent acquisitions; higher share of retail assets that see a faster churn; quicker debt aggregation that, in turn, enhances the ability of ARCs to execute their planned resolution strategy; and higher share of cash transactions, which are usually undertaken at more optimal valuations than SR transactions.
“More efficient restructuring due to the deterrence effect of the Insolvency and Bankruptcy Code is also a factor.”
Overall, with the evolving regulatory environment and stressed assets opportunity, private ARCs have had to continuously realign their business models. What will drive long-term sustainability is demonstration of the value that ARCs bring forth by enhancing both the extent and pace of resolutions, CRISIL Ratings said.