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The cumulative recovery rate of security receipts (SRs) for asset reconstruction companies (ARCs) is expected to rise to 75-80% by next fiscal year, driven by improved recoveries in real estate, thermal power, and roads. Retail loan resolutions and reduced acquisitions also contribute to this growth. Crisil Ratings projects INR 12,000 crore in recoveries, supported by rising property prices, stronger power demand, and inflation-linked toll hikes. Debt restructuring has become the dominant resolution method, yielding 85-90% recovery rates. With NPAs at multi-year lows, ARCs are focusing on low-vintage assets, ensuring sustainable growth through strategic acquisitions and restructuring efforts.
The cumulative recovery rate of security receipts (SRs) for asset reconstruction companies (ARCs) is set to rise for the second consecutive year, increasing by up to 15 percentage points annually and reaching 75-80% by the next fiscal year. This improvement is being driven by three key factors: the strong performance of stressed assets in infrastructure sectors such as real estate, thermal power, and roads; a greater proportion of retail and low-vintage assets in ARC portfolios; and a slowdown in new acquisitions compared to incremental recoveries. Advertisement
A study of approximately INR 38,000 crore (USD 4.56 billion) worth of SRs rated by Crisil Ratings has provided these insights. The expected recovery for Crisil-rated SRs in the next fiscal year is around INR 12,000 crore (USD 1.44 billion), with about half of this amount coming from stressed assets in real estate, thermal power, and roads. This marks an increase from 34% in the current fiscal year, largely influenced by several positive market conditions.
The performance of stressed assets in these sectors has improved, and the deterrent effect of the Insolvency and Bankruptcy Code (IBC) is facilitating debt restructuring. This strategy has emerged as the preferred resolution approach, benefiting both the promoters of stressed assets and ARCs.
According to Crisil Ratings, three major trends have contributed to rising cash flows for ARCs in recent fiscal years. Stressed residential real estate projects have become financially viable due to rising property prices and reduced inventories in India's top six cities. Additionally, thermal power plants have experienced increased demand, supported by adequate coal availability and timely payments by power distribution companies (discoms). Furthermore, inflation-linked toll hikes and timely annuity payments by the National Highways Authority of India (NHAI) have improved recoveries for stressed road assets. These favourable trends are expected to support ARC recoveries in the medium term.
Retail loan portfolios are also playing a key role in improving ARC recoveries. The cumulative recovery rate for these assets is projected to reach 60-65% in the next fiscal year, up from 55-60% this year. This increase is due to the faster churn rate of retail loans, which are typically resolved within 2.5-4.0 years, compared to 5-6 years for corporate assets.
The banking industry's gross non-performing assets (NPAs) have fallen to a multi-year low of less than 3%. A regulatory amendment allowing ARCs to acquire Special Mention Accounts (SMAs) has further supported the sector. These low-vintage delinquent accounts have enabled ARCs to pursue timely resolutions without lengthy legal battles, leading to early recoveries. As a result, ARCs are increasingly focusing on acquiring low-vintage assets. The share of SMAs in new acquisitions has risen to 22% in the first half of this fiscal year, compared to just 4% last year among Crisil-rated SRs.
Debt restructuring has now become the dominant resolution strategy, replacing asset sales, which were more common in the past. Among Crisil-rated SRs, about half of the rated amount across different asset sizes has been resolved through restructuring.
The benefits of restructuring have been highlighted by industry experts. Crisil Ratings has noted that ARCs receive steady payments from restructured assets, with an average recovery rate of 85-90% of the debt. Other recovery methods, such as settlements or asset sales, typically yield lower returns. A Crisil Ratings expert noted that the improving performance of stressed assets and the deterrent effect of the IBC would enable ARCs to leverage restructuring as a resolution strategy, even for moderate-sized asset acquisitions with higher delinquent vintage.
With the controlled levels of NPAs limiting new acquisitions, the cumulative recovery rate is expected to benefit from a slower increase in outstanding SRs compared to incremental recoveries from stressed assets.
As the ARC sector evolves, the focus will need to remain on sustaining the current momentum in stressed asset resolution. A strategic approach to new acquisitions and restructuring will be crucial in ensuring long-term stability. While the sector benefits from favourable economic conditions, ongoing efforts to refine business strategies will determine its future growth and sustainability.
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