Private ARCs’ Assets Expected to Decline by 7-10% in Fiscal 2025: CRISIL Ratings
The assets under management (AUM) of private asset reconstruction companies (ARCs) are anticipated to decline by 7-10% in the current fiscal year, according to a report by CRISIL Ratings. The AUM is expected 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. This decline is attributed to a slowdown in acquisitions and a steady rate of redemptions.
Factors Contributing to the Decline
Acquisitions by private ARCs are likely to decelerate in fiscal 2025 due to limited new opportunities in the corporate segment and a moderated rebound in retail acquisitions. Gross non-performing assets (NPAs) have reached a multi-year low of less than 2% as of March 31, 2024, reducing opportunities in the corporate sector. Additionally, the retail sector has controlled NPAs, further impacting acquisition strategies.
Private ARCs also face increased competition from a newly established government-backed ARC, which uses a guarantee-backed security receipt model to resolve stressed corporate assets. This makes it difficult for private ARCs to compete, especially in older NPAs due to legal and enforcement challenges.
Opportunities and 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 focus 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.
Recent Trends and Future Outlook
In fiscal 2024, there was an increase in corporate debt acquisitions by ARCs, focusing on special-mention accounts and lower vintage cash flow-generating assets. This led to a reduction in discount rates, which decreased to approximately 55% in fiscal 2024 from 80% 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% of SRs issued in fiscal 2022 were redeemed within two years, compared to a range of 8-28% 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.
Doubts Revealed
ARCs -: ARCs stands for Asset Reconstruction Companies. These companies buy bad loans from banks and try to recover the money from the borrowers.
AUM -: AUM stands for Assets Under Management. It means the total value of assets that a company manages for its clients.
Fiscal 2025 -: Fiscal 2025 refers to the financial year 2024-2025. In India, a fiscal year starts on April 1 and ends on March 31 of the next year.
CRISIL Ratings -: CRISIL Ratings is a company that gives ratings to businesses and financial institutions. These ratings help people understand how safe or risky it is to invest in them.
Redemptions -: Redemptions mean the process of getting back the money that was invested. In this context, it means ARCs are getting back the money they invested in bad loans.
NPAs -: NPAs stands for Non-Performing Assets. These are loans or advances that are not generating any income for the bank because the borrower is not making the required payments.
Government-backed ARC -: A government-backed ARC is an Asset Reconstruction Company that is supported or funded by the government. It competes with private ARCs to buy and manage bad loans.
Stressed corporate assets -: Stressed corporate assets are assets or loans of companies that are struggling financially and are unable to pay back their loans on time.
