Synopsis
Asset Reconstruction Companies (ARCs) are set to experience improved redemption rates for Security Receipts tied to stressed retail assets in the next fiscal year, driven by enhanced recoveries from low-vintage accounts and regulatory changes.Key Takeaways
- ARCs expect a redemption rate increase of 600 BPS.
- Cumulative redemption could reach 69-71 percent.
- Improved recoveries from low-vintage borrowers.
- Regulatory changes support faster recoveries.
- Higher settlements in secured and unsecured loans.
New Delhi, March 25 (NationPress) Asset Reconstruction Companies (ARCs) are projected to witness a rise in the redemption rate of Security Receipts (SRs) associated with stressed retail assets in the upcoming financial year, according to a recent report released on Tuesday.
The Crisil report indicates that the overall redemption rate is set to increase by around 600 basis points (BPS), reaching between 69-71 percent.
This enhancement is primarily attributed to improved recoveries from low-vintage accounts and elevated settlement rates across both secured and unsecured asset classes.
Furthermore, recent regulatory modifications in settlement guidelines are anticipated to facilitate faster recoveries.
A review of a retail SR portfolio valued at approximately Rs 19,000 crore, encompassing both secured and unsecured stressed debt, shows that recoveries are on the rise due to a growing percentage of low-vintage borrowers.
The proportion of such borrowers, categorized as Special Mention Accounts (SMA), has escalated from about 5 percent in FY23 to nearly 25 percent in FY24.
These borrowers are more accessible, requiring less operational effort for collections compared to those burdened with older, deep-vintage loans.
Consequently, ARCs have successfully recovered the full principal outstanding (POS) in numerous instances, as noted in the report.
In the secured loan segment, which includes home loans and loans against property, a robust asset coverage ratio has motivated borrowers to fulfill their payment obligations.
Data from the secured SR portfolio indicates that borrowers with asset coverage nearly double the loan value have settled their loans above the POS.
In other scenarios, settlements have reached approximately 90 percent of the outstanding principal. Swift settlements in these instances enable faster redemption of SRs, benefiting ARCs.
For unsecured loans, excluding microfinance, borrowers’ desire to retain a good credit score and qualify for new loans has led to increased settlement rates.
An analysis of five lakh accounts in the unsecured portfolio revealed that the cumulative closure rate by FY24 was 7.3 percent among working-age borrowers, in contrast to only 4.7 percent for the rest.
While recoveries show positive trends, the Reserve Bank of India (RBI) has intensified regulatory scrutiny on ARCs, as mentioned in the report.
In January 2025, the RBI permitted ARCs to establish their own Board-approved policies for settling dues.
This adjustment allows the Independent Advisory Committees (IACs) of ARCs to concentrate solely on larger borrowers.
Small-ticket loans, those below Rs 1 crore, can now be settled outside the IAC framework, significantly easing the operational load on ARCs.
