CRISIL Report: Private ARCs' AUM to Decline by 7-10% in Fiscal 2025

A report by CRISIL Ratings predicts a 7-10% decline in the assets under management (AUM) for private asset reconstruction companies (ARCs) in fiscal 2025. Contributing factors include fewer acquisitions, increased competition, and steady redemption rates of security receipts (SRs). Despite challenges, opportunities exist in stressed corporate assets.

The assets under management (AUM) of private asset reconstruction companies (ARCs) are expected to drop by 7-10% this fiscal year, according to a report by CRISIL Ratings. AUM is forecasted to fall to between Rs 1.2 lakh crore and Rs 1.25 lakh crore by fiscal 2025, down from Rs 1.35 lakh crore last year.

CRISIL Ratings indicates that acquisitions by private ARCs will slow in fiscal 2025. Private ARCs have averaged Rs 30,700 crore in security receipts (SRs) issued annually over the last three years. This trend is predicted to decline due to fewer corporate opportunities and a controlled rebound in retail acquisitions.

Private ARCs also face increased competition from a new government-backed ARC, which uses a guarantee-backed security receipt model to resolve stressed corporate assets. This competition poses challenges, particularly in older NPAs due to legal and enforcement issues.

Despite the competitive landscape, opportunities remain in existing stressed corporate assets, with banks writing off over Rs 13 lakh crore of NPAs from fiscal 2018 to 2024. Private ARCs are likely to focus on lower vintage NPAs, where resolution challenges are fewer.

The fiscal year 2024 saw an increase in corporate debt acquisitions by ARCs, focusing on special-mention accounts and lower vintage cash flow-generating assets. This led to a reduction in discount rates, reflecting improved acquisition quality.

SR redemption rates also play a significant role in AUM growth. Fiscal 2024 saw SR redemptions equal issuances, resulting in a flat AUM. Private ARCs recorded their highest SR redemptions at over Rs 31,000 crore, up from Rs 27,000 crore in fiscal 2023.

Recent acquisitions have shown better recovery rates, with 47% of SRs issued in fiscal 2022 redeemed within two years, compared to 8-28% for acquisitions between fiscal 2016 and 2018. Factors such as higher asset quality, an increased share of retail assets, efficient debt aggregation, and the effectiveness of the Insolvency and Bankruptcy Code are contributing to faster recoveries.

The evolving regulatory environment and shifting opportunities in stressed assets will require private ARCs to continuously realign their business models. Long-term sustainability hinges on their ability to enhance the pace and extent of resolutions in the asset reconstruction landscape. (ANI)

(With inputs from agencies.)