ARC recoveries from retail loan assets may rise to 60-65%

The growth in ARC recoveries is expected to be around 8 per cent next fiscal, driven by the increasing acquisition of retail loan portfolios. This development is likely to have a positive impact on the banking industry, as it will help to further reduce NPAs and improve asset quality. ‎

For asset reconstruction companies, the cumulative recovery rate of security receipts (SRs) is set to jump up for the second straight year by up to 15 percentage points per annum, touching 75-80 per cent by next fiscal. “There are three reasons for this: one, healthy performance of stressed assets in key infrastructure sectors (real estate, thermal power and roads); two, higher share of retail and low vintage assets; and three, lower growth in new acquisitions in comparison to incremental recoveries,” it said.

SRs are instruments issued by ARCs as consideration for their purchase of distressed assets from banks/ NBFCs.

In addition, the improving performance of stressed assets in these infrastructure sectors and the deterrence effect of the Insolvency and Bankruptcy Code (IBC) are impelling debt restructuring, which is emerging as a most-preferred resolution strategy and a win-win for both promoters of the stressed assets and ARCs. An analysis of Rs 38,000 crore worth of SRs rated by Crisil Ratings indicates as much, Crisil said.

“Next fiscal, out of an expected recovery of Rs 12,000 crore for Crisil-rated SRs, about half will be from stressed assets in the real estate, thermal power and roads sectors, up from ~34 per cent likely this fiscal, driven by several factors,” Crisil said.

“Three factors responsible for the rising ARC cash flows have converged in the past 2-3 fiscals. One, stressed residential real estate projects have turned viable as property prices rose and inventories declined in the top six cities,” said Mohit Makhija, Senior Director, Crisil Ratings. Two, thermal power plants have seen demand growing amid adequate coal availability and timely payment by discoms. And three, inflation-linked increases in toll and timely annuity payments by the National Highways Authority of India are aiding recoveries for stressed road assets. The favourable demand factors driving debt restructuring observed for these sectors will continue to support recoveries for ARCs over the medium term, it said.

Such low-vintage delinquent accounts enable ARCs to take timely actions through faster resolutions sans protracted legal battles, thus supporting revival through early recoveries. ARCs are expected to sharpen focus on increasing the share of low vintage assets in new acquisitions. This is also reflected in SMAs contributing 22 per cent of new acquisitions in the first half of this fiscal as against 4 per cent last fiscal among the SRs rated by Crisil Ratings, it said.