ARCs assets likely to decline by up to 10% in FY25: Crisil

Assets under management (AUM) of private asset reconstruction companies (ARCs), as measured by security receipts (SRs) outstanding, is expected to decline by 7-10% this fiscal as acquisitions will trend lower, while redemptions, which have strengthened in recent years, are likely to remain healthy. CRISIL Ratings estimates private ARCs AUM at Rs 1.2-1.25 lakh crore by the end of fiscal 2025, down from Rs 1.35 lakh crore the previous fiscal.

Ajit Velonie, Senior Director, CRISIL Ratings, says: “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, 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% 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 existing stock of stressed corporate assets, with banks having written off over Rs 13 lakh crore2 of NPAs between fiscals 2018 and 2024, 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 lower vintage NPAs given the legal and enforcement related challenges in older assets. On the retail assets side, the operational intensity of the resolution process for retail assets 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, with ARCs taking over a few special-mention accounts and lower vintage cash flow-generating corporate assets.

The better quality of acquisitions was also reflected in discount rates falling to ~55% in fiscal 2024 from ~80% in fiscal 2023 given the nature and vintage of assets. 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 Rs 31,000 crore, against ~Rs 27,000 crore in fiscal 2023. An analysis of private ARCs rated by CRISIL Ratings indicates better recoveries for recent vintage acquisitions. In fact, 47% of SRs issued in fiscal 2022 were already redeemed within two years, i.e. by March 2024. This contrasts with earlier periods—for acquisitions done between fiscals 2016 and 2018, the redemption range was 8-28% in a two-year period.

Subha Sri Narayanan, Director, CRISIL Ratings, says: “The faster recoveries in recent years can be attributed to a combination of factors: lower vintage and 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.

Also Read: ARCs to recover 500-700 bps more from stressed residential realty projects