ARCs to see uptick in cumulative recovery rates in FY25 and 26: Crisil
Mumbai, Jan 30, 2025
The rating agency Crisil Ratings today said asset reconstruction companies (ARCs) are likely to see the cumulative recovery rate of security receipts (SRs) improve by up to 15 percentage points to 75-80 per cent in the next financial year (FY26). The improvement in recoveries will be driven by factors such as the healthy performance of stressed assets in key infrastructure sectors like thermal power and roads, it said.
The higher share of retail and low-vintage assets, along with lower growth in new acquisitions compared to incremental recoveries, would also aid performance.
The cumulative recovery rate on SRs is estimated at 65-70 per cent for the current financial year. The recovery rates were 36 per cent in FY23 and 49 per cent in FY24. SRs are financial instruments issued to investors as part of a resolution arrangement.
Crisil, in a statement, said the improving performance of stressed assets in infrastructure sectors and the deterrence effect of the Insolvency and Bankruptcy Code (IBC) are driving debt restructuring. Debt recast is emerging as the most preferred resolution strategy and a win-win for both promoters of stressed assets and ARCs. An analysis of Rs 38,000 crore worth of SRs rated by Crisil Ratings indicates as much.
Next financial year, out of an expected recovery of approximately Rs 12,000 crore for Crisil-rated SRs, about half will be from stressed assets in the real estate, thermal power, and road sectors, up from about 34 per cent likely this financial year (FY25), driven by several factors.
Mohit Makhija, senior director, Crisil Ratings, said three factors responsible for the rising ARC cash flows have converged in the past two to three financial years. One, stressed residential real estate projects have turned viable as property prices rose and inventories declined in the top six cities.
Two, thermal power plants have seen demand growing amid adequate coal availability and timely payments by state distribution companies. And finally, inflation-linked increases in tolls and timely annuity payments by the National Highways Authority of India are aiding recoveries for stressed road assets.
Crisil said the increasing acquisition of retail loan portfolios has also been supportive, with cumulative ARC recoveries for these assets projected at 60-65 per cent in the next financial year (FY26), as against 55-60 per cent this financial year. This improvement is due to the faster churn of retail loans, with a lower redemption time of 2.5-4.0 years, compared to 5-6 years for corporate assets, it added.
[The Business Standard]
