Assets under management (AUM) of private asset reconstruction companies (ARCs), as measured by security receipts (SRs) outstanding, are expected to de-grow by 7-10% in the current fiscal as acquisitions will trend lower, according to Crisil Ratings. However redemptions, which have strengthened in recent years, are likely to remain healthy.

Crisil Ratings estimates AUM of private ARCs at Rs 1.2-1.25 lakh crore by the end of fiscal 2025, down from Rs 1.35 trillion in the previous fiscal.

“Acquisitions by private ARCs are estimated to slow down in fiscal 2025, from an average of Rs 30,700 crore of SRs issued annually for the past three years, mainly due to two reasons,” said Ajit Velonie, senior director, Crisil Ratings. “One, limited fresh opportunity in the corporate segment, with gross non-performing assets (NPAs) being at a multi-year low of less than 2% as on March 31, 2024. Two, retail acquisitions may not see a sharp rebound after slowing in FY24 as opportunities remain moderate given controlled retail NPAs in the system thus far.”

To be sure, there is a sizeable opportunity in existing stock of stressed corporate assets, with banks having written off over Rs 13 lakh crore of NPAs between fiscals 2018 and 2024. However, private ARCs may not be very competitive in this segment thanks to the presence of the newly formed government-backed ARC, which has a mandate to resolve such assets supported by its unique guarantee-backed security receipt model.

Additionally, private ARCs are more focused on lower vintage NPAs given legal and enforcement-related challenges in older assets.

On the retail assets side, the operational intensity of the resolution process has significantly increased. Crisil Ratings believes ARCs will continue to tap both corporate and retail assets based on opportunity and value.

Fiscal 2024 witnessed a rise in the share of corporate debt acquired, with ARCs taking over a few special-mention accounts and lower vintage cash flow-generating corporate assets. The better quality of acquisitions was also reflected in discount rates falling to 55% from 80% in FY23.

Apart from the quantum of acquisitions, what also impacts the AUM growth is the rate of SR redemption. Fiscal 2024 was the first year when SR redemptions of private ARCs were similar to issuances of security receipts, resulting in a flattish AUM. Private ARCs saw the highest level of SR redemption at over Rs 31,000 crore, compared with Rs 27,000 crore in FY23.