Issuance of security receipts by ARCs drop, redemptions jump: Crisil

ARCs will see their revenue mix continue to tilt towards recovery-linked income, away from primarily management fee-driven income, said Crisil

Redemptions of security receipts (SRs) issued by private sector asset reconstruction companies (ARCs) are outpacing new issuances. In H1FY26, private sector ARCs saw Rs 14,500 crore of SR redemptions, while only Rs 9,600 crore of SRs were issued.

 

Additionally, in FY25, private ARCs saw security receipt (SR) redemptions of Rs 26,900 crore. However, new SR issuances declined more than a third to Rs 20,000 crore from Rs 31,000 crore in FY24.

 

With redemptions outpacing acquisitions, assets under management (AUM) or outstanding SRs will decline a further 4-6 per cent in FY26 and FY27 to Rs 1 trillion, said Crisil Ratings in a report.

 

 

These ARCs will see their revenue mix continue to tilt towards recovery-linked income, away from primarily management fee-driven income.

 

“Recoveries have improved in recent years due to several factors. One, lower vintage of assets acquired recently, which has enabled higher and faster recoveries. Two, a higher share of retail assets that typically churn faster. And three, more optimally priced cash transactions. Hence, SR redemptions have accelerated, and the continued strong recovery post SR redemptions has contributed to the increase in recovery-linked income,” said Subha Sri Narayanan, director, Crisil Ratings.

 

According to the report, share of recovery-linked income, i.e., income earned by ARCs from recoveries once all outstanding SRs are redeemed and any contractual payout to investors is done, rose to 44 per cent in FY25 from sub 20 per cent in FY22, driven by a favourable recovery environment and subdued acquisitions.

 

This shift in revenue composition is also attributable to a rising share of cash transactions, preferred by ARCs with substantial investment capacity and the ability to attract investors. Notably, the share of cash deals for rated ARCs increased to 65 per cent of debt acquired in FY25 from about 40 per cent in FY22, the report said. 

 

“In cash transactions, where the selling lender does not hold any SRs, there may not be a standard management fee structure. When the ARC invests entirely on its own, there is no management fee in any case, and income is entirely recovery-linked,” said Aesha Maru, associate director, Crisil Ratings, adding that even when a third-party investor is involved, many transactions are structured without a fixed management fee, or with a low fixed fee, and instead offer higher, albeit back-ended, benefits to ARCs upon achieving a pre-determined return for the investors.

 

The report also highlighted that the regulatory environment will also impact revenue of ARCs. Reserve Bank of India’s proposed guidelines on the securitisation of stressed assets would allow ARCs to act as resolution managers, enabling them to build asset-light, fee-based revenue streams by leveraging their existing resolution infrastructure and expertise.