Private ARC AUM may drop 4-6% as redemptions outpace acquisitions: Crisil Ratings

Time of India

3 days ago

Assets under management
(AUM) of private asset reconstruction companies (ARCs), as measured by security receipts (SRs) outstanding, is expected to decline 4-6 per cent to Rs 1.05 lakh crore this fiscal after sliding 15 per cent last fiscal, according to a latest report by
Crisil Ratings
.
The rating agency said that the acquisition of stressed assets will continue to trend lower even as redemptions, which have improved in recent years, are likely to remain healthy, which will assist the ARCs.
Additionally, with the securitisation of NPAs potentially disrupting the industry's status quo, ARCs may have to seek alternative opportunities to drive growth and profitability.
The Crisil Ratings further added that with the Reserve Bank of India's (RBI) draft guidelines of April 2025 providing a framework for this new product, ARCs must prepare to pivot and adapt to a rapidly changing landscape.
This fiscal, acquisitions by private ARCs will remain subdued. SRs issued last fiscal had already reduced 29 per cent to Rs 22,000 crore from Rs 31,000 crore in fiscal 2024, the report added.
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In the corporate segment, this was largely owing to limited opportunities given that gross non-performing assets (NPAs) for banks in the segment were at a multi-year low of less than 2 per cent as on March 31, 2025, and expected to remain subdued over the medium term, the report added.
The report further said that despite the existence of a large stock of written-off corporate loan assets, private ARCs may not be very competitive, especially for large accounts, because of competition from the only government-supported ARC with its unique guarantee-backed SR model.
As for retail assets, higher operational intensity due to stringent regulatory needs had reduced the interest among ARCs.
Subha Sri Narayanan, Director, Crisil Ratings, said, "However, retail acquisitions could see some pick-up this fiscal for two reasons. One, there is an uptick in delinquencies in certain segments, such as microfinance and unsecured loans. Two, the regulations have become more conducive. For instance, there is clarity now on appointing the selling entity as a servicer. This practice, commonly followed by ARCs, had raised eyebrows at the regulator. Moreover, ARCs can now settle retail loans under Rs 1 crore without IAC3 approval, simplifying the process."
But such acquisitions may not necessarily be AUM-accretive, given the relatively higher discount rates in retail pools, especially for unsecured loans. Nevertheless, private ARCs will continue to tap both
corporate and retail assets
based on opportunity and value.
Apart from the quantum of acquisitions, the healthy trajectory of SR redemptions also had a bearing on AUM growth for ARCs.
Lower vintage of assets in recent acquisitions, higher share of retail assets that typically churn faster, and more of optimally priced cash transactions were some of the factors driving this trend.
In this milieu, private ARCs continued to see high SR redemptions at over Rs 28,600 crore last fiscal, outpacing acquisitions for the second consecutive year.
Another aspect that ARCs have had to manage over the years is the evolving regulatory environment, the report added.
The RBI published draft guidelines on a new product, i.e., the securitisation of stressed assets, on April 5, 2025, offering lenders an alternative to the existing ARC mechanism.
This involves the selling entities -- banks and other institutions -- hawking their bad loans to special purpose entities (SPEs) that, in turn, will create securities and sell to investors.
Such SPEs may appoint resolution managers (ReMs) to be responsible for the administrative process and recovery of the underlying stressed exposures. Only the RBI-regulated entities, i.e., scheduled commercial banks (excluding regional rural banks), non-banking financial companies (NBFCs; including housing finance companies) and ARCs can be appointed as ReMs.
Aesha Maru, Associate Director, Crisil Ratings, stated, "The new product could increase competition for ARCs when it comes to acquisitions. They can look to build asset-light, fee-based business models by leveraging the existing resolution infrastructure and expertise in stressed assets resolution and become ReMs under the new framework."
"Implemented well, ARCs can reduce dependency on management fees and upside income as their primary revenue sources (which remain linked to the pace of acquisitions and redemptions) and replace that with fee income from direct transactions between selling institutions and investors. But the level of activity here would be a function of the asset quality in the financial sector," Maru further added.