Asset Reconstruction Companies Set To Grow 10% This Fiscal: Crisil Report

The asset reconstruction industry is set to clock the best growth this fiscal as their asset under management is expected to increase by almost 10% to Rs 1.1 lakh crore, a report said on Thursday.

The 29-player ARC industry began its journey in the second half of 2002 and has since undergone radical regulatory changes and challenges.

With the beginning of operation of public sector National Asset Reconstruction Co. and rising popularity of the Insolvency and Bankruptcy Code effective from May 2016 also pose challenge for the ARC industry.

Another major challenge is the steep fall in banks' non-performing assets, which is set to fall to under 5% by March, down from over 11% in FY18.

Assets under management of ARCs are set to grow 9.8% to a five-year high this fiscal, driven by a few large transactions to Rs 1.19 lakh crore. The AUM stood at Rs 1.09 lakh crore in FY22 and at Rs 1.03 lakh crore in the previous two fiscals, a Crisil team led by Krishnan Sitaraman, its senior director and deputy chief ratings officer, said in a report that was released at the ARC seminar organised by industry lobby Assocham.

The report attributed the double-digit growth to a few large NPAs sale by a bank and also to the NARCL beginning operations last month by taking over Jaypee Infra's Rs 9,350-crore NPA.

Another reason for the growth optimism is the major jump in private corporate debt going to ARCs, the report said.

Before the IBC gained traction among bankers, which Ashwini Kumar Tewari, the SBI managing director, attributed to the legal sanction for the IBC process as banking and finance is more about trust, the industry AUM was a low Rs 9,000 crore in FY13, which soared to Rs 42,000 crore in the next year.

Addressing the summit, Tewari said, incentivising an early resolution is something the industry has to look at. Another issue is the still-low recovery rate of 38%, which in 2016 was only 16%. "We've to find ways to make it more of a security receipts and cash structure because there cannot be endless capitalisation."

He also said ARCs need to improve their functioning given the popularity of IBC if they want to continue in their business as the IBC process has full legal protection while NPA sale to an ARC has no such protection.

Pointing out that the RBI framework for securitisation of stressed assets is going to be a game-changer, he said the industry needs corporates or other similar structured vehicles to buy out stressed assets with a mutually agreed haircut.

NS Vishwanathan, former deputy governor of RBI, said the problem ARCs and banks face are due to the delayed process and the system—both bankers and ARCs never thought of recovery of assets, but always thought of managing balance sheets.

Addressing the summit, Sunil Mehta, chief executive of the Indian Banks Association, said even though there are 29 ARCs, 70% of the industry AUM are with just five of them and 54% of the total net owned funds are with just the top three of them.

On the capital that ARCs have infused, the report said from Rs 2,500 crore capital deployed by 14 ARCs between fiscal 2003 and 2014, it has gone up to Rs 11,500 crore by 28 players in 2022.

On the composition of debt acquired by ARCs, the report said, until March last year 68% of the debt was corporate NPAs, down from a much higher 96% in FY19 when only 4% were non-corporate debt.

The report expects this declining trend to continue as ARCs focus more on retail assets from MSMEs and NBFCs.

According to the Association of ARCs, the industry has purchased around Rs 6.13 lakh crore of NPAS in book value as of March 2022, of which they invested Rs 43,000 crore of their own fund towards the purchase.