Asset reconstruction companies (ARCs) are expected to see the cumulative redemption rate of security receipts (SRs) issued for stressed retail assets improve by around 600 basis points (bps) to 69-71 per cent next fiscal, stated a report by Crisil Ratings. The firm analysed its rated retail SR portfolio, comprising approximately Rs 2,000 crore of stressed secured debt and around Rs 17,000 crore of unsecured stressed debt acquired to release the findings.
It said that improving redemptions will mainly be driven by two factors – healthy recoveries from low-vintage accounts and healthy settlement rates across secured and unsecured asset classes. Additionally, recent regulatory changes in settlement guidelines should also support faster recoveries going forward, it said.
“An increase in the proportion of low-vintage, or Special Mention Account (SMA), borrowers — also reflected in our rated SR portfolio — from ~5 per cent in fiscal 2023 to ~25 per cent in fiscal 2024, is driving the recoveries up,” the report maintained. For these, ARCs have seen recovery of the full principal outstanding, or POS, due to better accessibility and lower operational intensity for collections as compared to deep vintage borrowers.
Mohit Makhija, Senior Director, Crisil Ratings, said, “The improvement in redemption rate will differ asset class wise. The cumulative redemption rate for secured loans is expected to improve by ~1,200 bps next fiscal, much higher than the ~700 bps for unsecured loans. Having said that, the recent trend of under-recoveries in the microfinance sub-segment would likely cap the improvement in redemption rates for the unsecured segment going forward.”
Now, in terms of secured asset classes such as home loans and loans against property, healthy underlying asset coverage brings borrowers to the table for settlement. With improving asset coverage, settlement rates for secured loans have seen an uptick, stated the Crisil report, while maintaining that this is also reflected in its rated secured SR portfolio, where borrowers with ~2x asset coverage have settled above POS, while in other instances, they were at ~90 per cent of POS. For ARCs, settlements at above or near POS are the best-case outcomes as they result in faster redemption of SRs.
Furthermore, for unsecured loans other than microfinance, the intent of borrowers to improve their credit scores and maintain eligibility for fresh loans play a crucial role in their willingness to settle outstanding debt, and that will continue to drive recoveries.
Crisil analysed 5 lakh accounts in its rated unsecured portfolio to reveal that the cumulative closure rate till fiscal 2024 in working-age borrowers was 7.3 per cent against just 4.7 per cent for other borrowers.
On the other hand, in the microfinance segment of rated SR portfolio, growth in cumulative redemption rate is likely to moderate to 700 bps from earlier expectations of 1400 bps for FY26 because of over-leveraged borrowers.
“While recoveries are improving across asset classes, regulatory oversight of ARCs has been tightened by the Reserve Bank of India (RBI),” Crisil said.
In January 2025, the RBI allowed ARCs flexibility to frame Board-approved policy for settlement of dues by borrowers. This effectively allows the Independent Advisory Committees (IACs) of ARCs to focus on approval of settlement with large borrowers only. Small-ticket borrowers (loans < Rs 1 crore) can now be dealt outside IAC, which will reduce the operational intensity of ARCs significantly.
Sushant Sarode, Director, Crisil Ratings, said, “The recent regulatory announcement acts as a welcome move for ARCs bringing flexibility for settlement of small ticket size loans. This should speed up the approval process, reduce incidental costs and improve recovery rates for small-ticket loans, which had slowed in the past 6-9 months. These small-ticket loans comprise 40-50 per cent of our rated retail SRs.”
With ARCs diversifying into the retail segment, Crisil said, their adaptability to changing regulations will bear watching.