Multi-year low NPAs to shrink assets of private ARCs

Assets under management (AUM) of private asset reconstruction companies (ARCs) are expected to de-grow by 7-10% this fiscal as acquisitions will trend lower, while redemptions, which have strengthened in recent years, are likely to remain healthy, according to Crisil.

The rating agency estimates private ARC AUM at ₹1.2-1.25 lakh crore by the end of fiscal 2025, down from ₹1.35 lakh crore the previous fiscal.

“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% 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,” says Ajit Velonie, senior director, CRISIL Ratings.

To be sure, there is a sizeable opportunity in existing stock of stressed corporate assets, with banks having written off over ₹13 lakh crore of NPAs between fiscals 2018 and 2024, says Crisil.

It, however, says that 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. Crisil 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 rating agency says. 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.

“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,” says Subha Sri Narayanan, director, Crisil.