ARCs facing slowdown in recoveries due to failed auctions amid Covid: Icra

Asset reconstruction companies (ARCs) are facing slowdown in recoveries from bad loans procured from banks due to failed auctions, absence of bidders and delay in payments amid Covid-19 pandemic, according to a report.

The ratings of security receipts (SRs) issued by ARCs have seen downgrades due to delay in recoveries and decline in expected recovery value on the SRs.

"The recovery for the ARCs are getting affected due to deferment or failure of auctions due to unsatisfactory bids or absence of any bidders, default or delay in payment as per the agreed settlement plan or agreed restructuring terms," rating agency Icra said in its report.

Besides, resolution under Insolvency and Bankruptcy Code (IBC) proceedings has seen a sharp slowdown in the first quarter of FY2021, with only 16 corporate insolvency resolution processes (CIRPs) ended in resolution, compared to 35 in the previous quarter.

Icra vice president and group head (structured finance) Abhishek Dafria said recovery for ARCs depends on the value realisation from the underlying securities, so willingness and fund availability with prospective acquirers is of utmost importance.

"As currently, the primary focus of the businesses is to set their own house in order first and preserve liquidity, acquirers are less keen to invest in further assets even when the same is available at an attractive valuation," he said.

Due to an expected increase in the recovery timeline as well as the decline in expected recovery value on the security receipts (SRs), the rating agency has observed higher downgrades with 37 per cent of trusts issuing SRs downgraded (from rated portfolio) as on June 2020, compared to 21 per cent rating downgrades observed in previous surveillance cycle (December 2019).

Specifically, unresolved SRs in older trusts acquired in FY2015 or prior, have seen a higher proportion of rating downgrades.