For asset reconstruction companies (ARCs), the cumulative recovery of security receipts (SRs) is set to improve by 500-700 basis points (bps) per annum to 55-60% next fiscal, according to a latest CRISIL report.
The recovery rate improvement will be driven by a greater share of cash-based transactions, greater exposure to retail loans and faster recovery in recent acquisitions due to lower vintage and better quality assets. An analysis of the SRs, with underlying assets of Rs 30,000 crore (25% of total such assets), indicates as much.
The share of cash-based transactions in CRISIL Ratings SR’s portfolio increased from 36% in fiscal 2022 to 40% last fiscal, and this trend is likely to continue, the agency said.
It added that the reduced capital requirement of ARCs – up to 2.5% of total SRs issued from 15% earlier – and lenders’ preference for upfront cash is increasing cash transactions.
An early exit for lenders in cash-based transactions improves the recovery rate, as lower SRs are issued compared to structured transactions.
Security Receipts (SRs) are instruments issued by Asset Reconstruction Companies as consideration for their purchase of non-performing assets (NPAs) from banks/NBFCs. SR reflects an interest in the underlying distressed asset/collection of distressed assets.
Another reason for the increased recovery rate is that ARCs’ participation in retail segment is likely to more than double to 15-18% next fiscal from fiscal 2022. This is beneficial as recovery for retail pools starts within a few months of acquisition, accelerating the cumulative acquisition. RediscoverySushant Sarode, Director, CRISIL Ratings
In contrast, recovery for corporate assets depends on the resolution strategy and can extend to 5-8 years. The past few years have also seen faster settlements and restructurings due to proactive monitoring by lenders as well as increased willingness of promoters to retain their businesses due to proactive monitoring by lenders and increased willingness of promoters to keep their businesses. to a deterrent effect of IBC.
According to the rating agency, an improving domestic economy and credit outlook for corporations after the pandemic, including an increase for some cyclical sectors, will also help the recovery rate this fiscal and the next.
For the CRISIL Ratings SR portfolio, the cumulative recovery in the first three years for trusts created in 2018 and 2020 was higher, by 35-40%, compared to trusts created in 2015.
The expected increase in recoveries will benefit recovery risk assessments of SRs in the near term. It further highlighted that recovery risk assessments saw more upgrades than downgrades in the first nine months of fiscal 2024.
Consolidation of small ARCs looms
Along with improving recoveries, likely consolidation due to the increase in minimum net owned fund (NOF) requirement to Rs 200 crore by the end of this fiscal, will also strengthen the ARC ecosystem. In fact, 2 of the 29 ARCs have already surrendered their licenses to the Reserve Bank of India within a year of the NOF guideline.
“Of the remaining 27 ARCs, 10 are below the required NOF threshold in terms of reported funds for fiscal 2023. Only a few will be able to raise funds and many small ARCs will find it difficult to reach the threshold by March 31, 2024,” Tanvi Fifadra, Team Leader, CRISIL Raksos showed.