Private sector asset reconstruction companies (ARCs) are set to see a 7-10 per cent decline in assets under management (AUM), as measured by security receipts (SRs) outstanding, in FY25 due to lower acquisitions, despite a sizeable opportunity in the existing stock of stressed corporate assets, rating agency CRISIL said in a report on Tuesday.
According to the rating agency’s estimates, AUM of private sector ARCs is expected to be Rs 1.2 – Rs 1.25 trillion in FY25 compared to Rs 1.35 trillion in the previous fiscal.
Banks have written off over Rs 13 trillion of non-performing assets (NPAs) between FY18 and FY24. However, private ARCs are not very competitive in this segment due to the presence of state-owned National Asset Reconstruction Ltd. (NARCL), which has a mandate to resolve such assets supported by its unique guarantee-backed security receipt model, CRISIL said in its report. The report added that private sector ARCs are more focused on lower-vintage NPAs, given the legal and enforcement-related challenges in older assets.
NARCL is eyeing stressed debt acquisitions totalling Rs 1.25 trillion, with offers for assets in different stages of acquisition and due diligence. Of the Rs 1.25 trillion, evaluations for assets valued at around Rs 40,000 crore are currently underway, as highlighted in the Economic Survey for 2023-24. So far, NARCL has acquired stressed debt from 18 accounts, worth Rs 92,000 crore.
According to Ajit Velonie, Senior Director, CRISIL Ratings: “Acquisitions by private ARCs are estimated to slow down in fiscal 2025, from an average of approximately Rs 30,700 crore SRs issued annually for the past three years.”
This is mainly because there is limited fresh opportunity in the corporate segment, with gross NPAs at a multi-year low of below 2 per cent as of March 2024. Additionally, retail acquisitions may not see a sharp rebound in FY25 after slowing in FY24 because opportunities remain moderate given the controlled retail NPAs in the system thus far, Velonie explained.
According to the report, in FY24, the discount rate in ARC acquisitions fell to 55 per cent compared to 80 per cent in FY23 due to ARCs taking over a few special-mention accounts and lower-vintage cash flow-generating corporate assets.
Further, the report highlighted that in FY24, SR redemptions of private ARCs were similar to SR issuances, resulting in a flat AUM. Private ARCs saw their highest level of SR redemption at over Rs 31,000 crore, compared to approximately Rs 27,000 crore in FY23.
First Published: Aug 20 2024 | 8:04 PM IST
