4 days ago
Bad Loans Shrinking, ARCs Need New Business Model: Crisil
Mumbai: Crisil has called for a shift in the business model of private asset reconstruction companies (ARCs), warning that their assets under management (AUM) are likely to shrink further as the stock of bad loans dwindles.
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AUM, measured through outstanding security receipts (SRs), is expected to fall 4–6% to around Rs 1.05 lakh crore in FY26, following a 15% drop last year, which included a one-time Rs 13,000 crore write-off by a large ARC. Even without this, SR issuances dropped 29% to Rs 22,000 crore in FY25 from Rs 31,000 crore in FY24.
Redemptions have outpaced acquisitions for two consecutive years, aided by younger asset vintages, faster churn in retail pools, and more cash deals.
With gross NPAs in the corporate segment falling below 2%, fresh acquisition opportunities are scarce. Additionally, the govt-backed NARCL has gained a competitive edge in acquiring large corporate loans due to its guarantee-backed SR model.
Retail acquisitions, which had slowed due to operational complexity, may see a partial revival. 'Retail acquisitions could see some pick-up this fiscal for two reasons,' said Subha Sri Narayanan, director at Crisil Ratings.
'One, there is an uptick in delinquencies in certain segments, such as microfinance and unsecured loans. Two, the regulations have become more conducive.' She pointed to recent rules that allow ARCs to settle loans under Rs 1 crore without committee approval and formally permit the selling lender to act as servicer.
However, she added, 'Such acquisitions may not necessarily be AUM-accretive given the relatively higher discount rates in retail pools.'
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"The short term outlook of ARC industry is linked to issuance of final guidelines on Securitization of Stressed Assets and how market responds to it. I believe originators would have a natural preference for this market based model in respect of small and mid sized loans, instead of going legal with attendant delay in admission and disposal of cases. The volume of stressed assets in market is set to increase and ARCs with nearly two decades resolution experience will have the head start and the preferred choice as Resolution Manager( ReM ) and provide additional business for ARC beyond AUM".
Hari Hara Mishra, CEO, Association of ARCs in India.
The RBI's draft guidelines issued in Apr 2025 propose a new route for bad loan resolution—securitisation through special purpose entities (SPEs), which can appoint resolution managers (ReMs), including ARCs. 'They can look to build asset-light, fee-based business models by leveraging the existing resolution infrastructure and expertise,' said Aesha Maru, associate director at Crisil Ratings.
According to Crisil, such a pivot could help ARCs reduce dependence on acquisition-linked income and sustain operations through resolution fees. Long-term viability, Crisil noted, will depend on agility, innovation, and the ability to demonstrate value in a more competitive landscape.
