ARCs Close To Recovering Nearly Half The Debt They Acquired, Says Crisil

Recoveries on bad assets by asset reconstruction companies have risen to nearly half as of 2018, according to Crisil Ratings Ltd.

The ratings agency said in a report that it prepared with Assocham and the ARC Association of India that gross recovery as a percentage of principal debt acquired by the country’s ARCs is expected to range between 44 percent and 48 percent.

Recovery rates are driven by lower vintage and better quality of assets that have been acquired in recent years and is also driven by changes in regulatory framework and improved credit discipline among borrowers, Crisil said.

It said recent amendments in regulations—including the revised Reserve Bank of India stressed assets resolution framework of June 7—have allowed ARCs to participate in joint lenders’ forums.

This has aided the quick process of acquiring non-performing assets from the banking system, Crisil said, in addition to an increased focus by banks and regulators to resolve stressed assets and recover value in a time-bound manner.

The number of ARCs in India has more than doubled in about five years. The total assets under management is estimated to be around Rs 1.05 lakh crore this year, with ARCs purchasing around Rs 40,000 crore during 2018-19.

The increase in assets under management of the industry were so far due to resolution in a few large stressed accounts and write-offs, and the rating agency expects discounts to remain on the higher side going forward as cash deals have become prominent.

As a result. Crisil estimates that by 2021 the AUMs of the ARC industry will grow by 8-10 percent on an annualised basis. Further, security receipts issued by the ARCs are now receiving interest from many investors, it said.

Two years ago, the majority of the security receipts were subscribed by either selling financial institution or the ARCs themselves, Crisil said. But since a lot of institutional investors like global pension funds, domestic funds, foreign banks, private equity players and hedge funds have been buying them.

Crisil said the share of investments by institutional investors increased to almost 60 percent in FY19 from 1 percent in FY17. Participation from these investors would increase going forward, but it will depend on the ARC’s ability to recover value, the rating agency said.