Asset reconstruction companies (ARCs) are likely to post a muted, de-growth in asset under management (AUM) in the current financial year due to lower availability and acquisition of large ticket stressed, non-performing loans (NPAs) and higher recoveries.

“AUM of private ARCs, as measured by security receipts (SRs) outstanding, is expected to de-grow by 7-10 per cent this fiscal as acquisitions will trend lower, while redemptions, which have strengthened in recent years, are likely to remain healthy,” CRISIL Ratings said in a report. The rating agency estimates private ARCs’ AUM at Rs 1.2-1.25 lakh crore by FY25 end, lower than ₹1.35 lakh crore in FY24.

Growth in AUM of private ARCs

Growth in AUM of private ARCs

Private ARCs saw their highest level of SR redemption, at over Rs 31,000 crore in FY24, against Rs 27,000 crore in FY23. Interestingly, 47 per cent of SRs issued in fiscal 2022 were already redeemed within two years. “Acquisitions by private ARCs are estimated to slow down in fiscal 2025, from an average of Rs 30,700 crore SRs issued annually for the past three years,” said Ajit Velonie, senior director at CRISIL.

Lower corporate NPAs

According to Hari Hara Mishra, CEO, Association of ARCs in India, Indian ARCs now are in a consolidation phase, and many players are reviewing their business strategies, including building up infrastructure for handling retail bad loans.

“Besides, there is conscious effort in scaling up the governance, compliance and risk management framework. ARC Association in recent times has been holding several in-house workshops and interactive programmes on these areas. ARCs are like shock absorbers and need to be overhauled periodically to keep it ready to absorb stress in the system, as it evolves,” he said.

Pallav Mohapatra, MD and CEO of Asset Reconstruction Company (ARCIL), said the stress in banks’ corporate loan books has reduced considerably since the regulator tightened underwriting standards after the asset quality review conducted in 2015.

Corporates also started deleveraging and did not opt for significant capacity expansion. If they did intend to raise capital for expansion, they chose the capital market route rather than bank loans, further lowering the share of corporate loans in banks’ overall advances. This led to lower availability of higher-quantum corporate bad loans for ARCs. ARCIL’s AUM rose to ₹16,800 crore in Q2FY25 from ₹16,400 crore in Q2FY24.

Retail, SME NPAs to drive growth

“The focus was on RAM (retail, agriculture and MSME loans), which grew up to 65 per cent (of lenders’ loan book) and in some banks it rose up to 75 per cent,” the MD said. Going ahead, the CEO expects more retail, SME bad loans to be put on the block by lenders. However, the quantum of such loans would be lower than corporate loans.

Just last week, JC Flowers Asset Reconstruction Company (ARC), acting as the trustee for JCF YES Trust, sought bids to sell ₹2,613 crore of retail, SME bad loans via a Swiss challenge auction, prompted by an anchor bid of ₹237.5 crore.

“Our AUM as on FY24 was around ₹15,000 crore, which rose to ₹16,800 crore by Q2FY25 and we are expecting AUM to rise to around Rs 17,000 crore by FY25. It will be almost the same as Q2FY25. By the end of FY26, we will likely reach ₹19,000 crore, and by FY27 AUM would be around ₹21,000 crore,” he said, adding that non-banking finance companies (NBFCs) are coming up with higher NPA sales, especially in the commercial real estate, MSME and retail segments.

Another senior official at a large ARC said they expect AUM to remain static at current level of ₹14,000 crore in FY25. “Recoveries have been good and as it is the main part of our business, we are happy about it. Because as overall NPAs are moderating, it is in some way weighing on acquisitions as of now,” the official said.

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