Private ARCs to face 7-10 per cent asset shrinkage this fiscal amidst slower acquisitions: CRISIL

New Delhi [India], August 20 : The assets under management (AUM) of private asset reconstruction companies (ARCs) are anticipated to decline by 7-10 per cent in the current fiscal year, according to a report by CRISIL Ratings.
The expected reduction in AUM, which is forecasted to fall to between Rs 1.2 lakh crore and Rs 1.25 lakh crore by the end of fiscal 2025, down from Rs 1.35 lakh crore the previous fiscal year, is attributed to a slowdown in acquisitions and a steady rate of redemptions.
The CRISIL Ratings report indicates that acquisitions by private ARCs are likely to decelerate in fiscal 2025. Over the past three years, private ARCs have averaged around Rs 30,700 crore in security receipts (SRs) issued annually.
However, this trend is expected to wane due to two main factors: limited new opportunities in the corporate segment, as gross non-performing assets (NPAs) have reached a multi-year low of less than 2 per cent as of March 31, 2024, and a moderated rebound in retail acquisitions due to controlled NPAs in the retail sector.
In addition to these challenges, private ARCs face increased competition from a newly established government-backed ARC. This entity, which utilizes a guarantee-backed security receipt model, is specifically tasked with resolving stressed corporate assets.
Consequently, private ARCs may find it difficult to compete, particularly in the segment of older NPAs due to associated legal and enforcement challenges.
Despite the competitive landscape, there are opportunities in existing stressed corporate assets. Banks have written off over Rs 13 lakh crore of NPAs between fiscal years 2018 and 2024.
However, private ARCs are likely to remain focused on lower vintage NPAs, where resolution challenges are less severe. On the retail front, the resolution process has become more operationally intensive, further impacting acquisition strategies.
The fiscal year 2024 saw an increase in corporate debt acquisitions by ARCs, with a focus on special-mention accounts and lower vintage cash flow-generating assets.
This shift led to a reduction in discount rates, which decreased to approximately 55 per cent in fiscal 2024 from 80 per cent in fiscal 2023, reflecting an improvement in the quality of acquisitions.
A significant factor affecting AUM growth is the rate of SR redemption. In fiscal 2024, redemptions of SRs equaled issuances for the first time, resulting in a flat AUM. Private ARCs recorded their highest level of SR redemptions at over Rs 31,000 crore, compared to around Rs 27,000 crore in fiscal 2023.
CRISIL Ratings' analysis reveals that recent acquisitions have seen better recovery rates. For instance, 47 per cent of SRs issued in fiscal 2022 were redeemed within two years, compared to a range of 8-28 per cent for acquisitions between fiscal years 2016 and 2018.
Faster recoveries are attributed to factors such as higher asset quality, an increased share of retail assets, efficient debt aggregation, a higher share of cash transactions, and the effectiveness of the Insolvency and Bankruptcy Code.
Overall, the evolving regulatory environment and shifting opportunities in stressed assets require private ARCs to continuously realign their business models. Long-term sustainability will depend on their ability to enhance the extent and pace of resolutions, demonstrating their value in the asset reconstruction landscape.