As acquisitions are expected to trend lower in the current year, the assets under management (AMU) of private asset reconstruction companies (ARCs), as measured by security receipts (SRs) outstanding, are expected to de-grow by 7-10% this fiscal year, as per the report by Crisil. The rating agency estimates the Private ARC AUM at Rs 1.2 to Rs 1.25 lakh crore by the end of FY25, a decline from Rs 1.35 lakh crore in the previous fiscal. Crisil has expected the ARCs to tap both corporate and retail assets based on opportunity and value.
Crisil highlighted that there exists a sizable opportunity in the stock of stressed corporate assets, as banks have written off over Rs 13 lakh crore of non-performing assets (NPAs). However, As the newly setup government-backed ARC has not only made its presence in the segment but also has a mandate to resolve such assets supported by its unique guarantee-backed security receipt model, private ARCs may not prove to be very competitive in this segment, as per Crisil Ratings.
“Acquisitions by private ARCs are estimated to slow down in fiscal 2025, from an average of around Rs 30,700 crore SRs issued annually for the past three years, mainly due to two reasons. One is the limited fresh opportunity in the corporate segment, with gross non-performing assets (NPAs) at a multi-year low of sub-2 per cent as on 31 March 2024. Second is that the 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,” stated Ajit Velonie, Senior Director, Crisil Ratings
There has been a rise in the share of corporate debt acquired as ARCs took over a few special-mention accounts (SMAs) and lower vintage cash flow-generating corporate assets. The discount rates fell to around 55 per cent in FY24 from 80 per cent in FY23, reflecting the better quality of acquisition.
In FY24, the SR redemptions of private ARCs were similar to SR issuances for the first time. 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. 47 per cent of SRs issued in fiscal 2022 were already redeemed within two years. Earlier, the redemption range for acquisitions done between fiscals 2016 and 2018 was 8 to 28 per cent in the two-year period.
“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,” said Subha Sri Narayanan, Director, Crisil Ratings
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