Crisil Forecasts 15% Surge in ARC Recovery Rate by 2025-26

Synopsis
Key Takeaways
- Projected recovery rate increase of 15% for ARCs.
- Strong performance in infrastructure sectors like real estate and thermal power.
- Debt restructuring becoming the preferred strategy.
- Low vintage assets contributing significantly to recoveries.
- Regulatory amendments aiding ARC acquisitions.
New Delhi, Jan 30 (NationPress) The cumulative recovery rate of security receipts for asset reconstruction companies (ARCs) is projected to increase by up to 15 percentage points annually for the second consecutive year, reaching 75-80 per cent by the upcoming financial year, as stated in a report by Crisil Ratings released on Thursday.
The report cites three primary factors contributing to this anticipated growth: strong performance of stressed assets in major infrastructure sectors (real estate, thermal power, and roads), an increased proportion of retail and low vintage assets, and a slower growth in new acquisitions compared to incremental recoveries.
Moreover, the improving performance of stressed assets within these infrastructure sectors, alongside the constraining influence of the Insolvency and Bankruptcy Code (IBC), is driving debt restructuring, which is becoming a highly favored resolution strategy, benefiting both the promoters of stressed assets and the ARCs, the report highlights.
An assessment of approximately Rs 38,000 crore worth of social security receipts (SRs) rated by Crisil Ratings supports this.
In the forthcoming fiscal year, an estimated recovery of around Rs 12,000 crore for Crisil-rated SRs is expected, with about half originating from stressed assets within the real estate, thermal power, and roads sectors, an increase from roughly 34 per cent anticipated in the current fiscal year due to various driving factors.
Mohit Makhija, Senior Director of Crisil Ratings, stated, “The rise in ARC cash flows can be attributed to three converging factors over the last 2-3 fiscal years. First, stressed residential real estate projects have become viable as property prices have risen and inventories have decreased in the top six cities.
“Second, thermal power plants are witnessing increased demand amid sufficient coal availability and timely payments by discoms.
“And third, inflation-linked toll increases and timely annuity payments from the National Highways Authority of India are supporting recoveries for stressed road assets.”
“The favorable demand factors propelling debt restructuring in these sectors will likely continue to bolster recoveries for ARCs in the medium term,” he added.
The growing acquisition of retail loan portfolios has also been beneficial, with cumulative ARC recoveries for these assets estimated at 60-65 per cent in the next fiscal year (8 per cent of anticipated recoveries), compared to 55-60 per cent in the current fiscal due to a quicker turnover of retail loans, which have a redemption period of 2.5-4.0 years as opposed to 5-6 years for corporate assets, according to the report.
In the context of the banking industry’s multi-year low gross non-performing assets, which are below 3 per cent, a regulatory amendment permitting ARCs to acquire Special Mention Accounts (SMAs) has provided a tailwind for these companies.
These low-vintage delinquent accounts enable ARCs to execute timely actions through quicker resolutions without lengthy legal disputes, thus fostering revival through early recoveries.
ARCs are anticipated to enhance their focus on increasing the share of low vintage assets in new acquisitions. This trend is also reflected in the contribution of SMAs to new acquisitions, which accounted for 22 per cent in the first half of the current fiscal compared to 4 per cent in the previous fiscal among the SRs rated by Crisil Ratings.
Furthermore, debt restructuring has emerged as the leading resolution strategy, diverging from past asset sales. Among Crisil-rated SRs, nearly half of the rated amount across various asset sizes has undergone restructuring as a resolution approach.
With a slowdown in new acquisitions (new SR issuances) due to controlled gross non-performing assets, the cumulative recovery rate will benefit from a slower increase in the outstanding SR base compared to incremental recoveries from stressed assets, the report notes.
The consistent healthy pace of resolving stressed assets and aligning business strategies to promote new acquisitions will be essential for the long-term sustainability of ARCs, the report concludes.