AUM of ARCs may decline 7-10% in FY25 due to lower acquisitions: CRISIL

AUM of private sector ARCs is expected to be Rs 1.2 - Rs 1.25 trillion in FY25 compared to Rs 1.35 trillion in the previous fiscal

Private asset reconstruction companies (ARCs) may see 7-10 per cent de-growth in asset under management (AUM), as measured by security receipts (SRs) outstanding, in financial year 2025 (FY25) due to lower acquisitions, rating agency CRISIL said in a report on Tuesday. This is despite a sizeable opportunity in existing stock of stressed corporate assets.

According to the rating agency’s estimates, AUM of private sector ARCs is expected to be at Rs 1.2 - Rs 1.25 trillion in FY25 compared to Rs 1.35 trillion in the previous financial year.

According to Ajit Velonie, Senior Director, CRISIL Ratings, “Acquisitions by private ARCs are estimated to slow down in fiscal 2025, from an average of Rs 30,700 crore SRs issued annually for the past three years.”

This is mainly because there is limited fresh opportunity in the corporate segment, with gross NPAs at a multi-year low of sub-2 per cent as of March, 2024. Additionally, retail acquisitions may not see a sharp rebound in FY25 after slowing in FY24 because opportunities remain moderate given the controlled retail NPAs in the system thus far, Velonie explained.

According to the report, in FY24, the discount rate in acquisitions of ARCs fell to 55 per cent in FY24 compared to 80 per cent in FY23 due to ARCs taking over a few special-mention accounts and lower vintage cash flow-generating corporate assets.

Further, the report highlighted that in FY24 SR redemptions of private ARCs were similar to SR issuances, resulting in a flattish AUM. Private ARCs saw their highest level of SR redemption at over Rs 31,000 crore, against Rs 27,000 crore in FY23. 

Banks have written off over Rs 13 trillion of non-performing assets (NPAs) between FY18 and FY24.

But private ARCs are not very competitive in this segment because of the presence of state-owned National Asset Reconstruction Ltd. (NARCL), which has a mandate to resolve such assets supported by its unique guarantee-backed security receipt model, CRISIL said in its report.

It said that private sector ARCs are more focused on lower vintage NPAs given the legal and enforcement related challenges in older assets.

NARCL is eyeing stressed debt acquisitions totalling Rs 1.25 trillion, with offers for assets in different stages of acquisition, due diligence.

Of the Rs 1.25 trillion, evaluations for assets valued at around Rs 40,000 crore are currently underway, the Economic Survey for 2023-24 had highlighted. So far, NARCL has acquired stressed debt from 18 accounts, worth Rs 92,000 crore.