Asset Reconstruction Companies Poised for Redemption Rate Surge Amid Regulatory Reforms

Asset reconstruction companies (ARCs) anticipate a significant boost in redemption rates for security receipts, driven by regulatory reforms and strong recovery efforts. The redemption rate for secured assets is expected to rise more sharply compared to unsecured loans. The evolving regulatory landscape aids efficiency in the Indian asset recovery market.

Asset reconstruction companies (ARCs) stand on the brink of a significant surge in the redemption rate of security receipts (SRs) for stressed retail assets. An increase of 600 basis points (bps) to 69-71 percent is expected in the coming fiscal year, according to Crisil Ratings.

ARCs, which purchase non-performing assets from banks to tidy up balance sheets, are projected to benefit from regulatory amendments and improved recovery strategies. Rising redemption rates are largely attributed to effective recoveries from low-vintage accounts and strong settlements across asset classes.

Regulatory changes in settlement guidelines are set to expedite recovery actions significantly. A remarkable shift in the share of low-vintage borrowers has enabled more efficient recovery processes, enhancing cash flows for ARCs and boosting investor confidence.

Significant gains in redemption rates, however, vary across asset classes. Secured loans set to see a cumulative increase of 1,200 bps, starkly higher than the estimated 700 bps for unsecured loans. The microfinance segment lags due to borrowing over-leverage, curbing improvements in this category.

For secured loans, settlements at or above the principal outstanding (POS) are ideal, leading to quicker redemption of SRs. Meanwhile, for unsecured loans, borrower intent to improve credit scores remains a critical driver, particularly among working-age borrowers aiming for loan eligibility.

Overall, the evolving regulatory landscape is expected to bolster the efficiency of stressed asset resolution in India, despite under-recovery challenges limiting improvements in microfinance redemption rates. This shift signifies a promising era for distressed asset recovery.

(With inputs from agencies.)