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The cumulative recovery rate of security receipts for asset reconstruction companies (ARCs) is set to jump by up to 15 percentage points per annum, for the second straight year, touching 75-80 per cent by the next financial year, according to a Crisil Ratings report released on Thursday. 

The report attributes the expected rise to three reasons which include a healthy performance of stressed assets in key infrastructure sectors (real estate, thermal power and roads), a higher share of retail and low vintage assets and a lower growth in new acquisitions in comparison to incremental recoveries.

In addition, the improving performance of stressed assets in these infrastructure sectors and the deterrence effect of the Insolvency and Bankruptcy Code (IBC) are impelling debt restructuring, which is emerging as a most-preferred resolution strategy and a win-win for both promoters of the stressed assets and ARCs, the report states.

An analysis of around Rs 38,000 crore worth of social security receipts (SRs) rated by Crisil Ratings indicates as much.

In the next fiscal year, out of an expected recovery of about Rs 12,000 crore for Crisil-rated SRs, about half will be from stressed assets in the real estate, thermal power and roads sectors, up from around 34 per cent likely during the current financial year, driven by several factors

Senior Director of Crisil Ratings, Mohit Makhija said, “Three factors responsible for the rise in ARC cash flows have converged in the past 2-3 fiscals. 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 payment by discoms.

"And three, inflation-linked increases in toll and timely annuity payments by the National Highways Authority of India are aiding recoveries for stressed road assets.”

“The favourable demand factors driving debt restructuring observed for these sectors will continue to support recoveries for ARCs over the medium term,” he added.

Increasing acquisition of retail loan portfolios has also been supportive, with the cumulative ARC recoveries for these assets projected at 60-65 per cent next fiscal (8 per cent) of recoveries expected for next fiscal), as against 55-60 per cent this fiscal due to faster churn of retail loans with lower redemption time of 2.5-4.0 years, as against 5-6 years for corporate assets, according to the report.

Amid the multi-year low gross non-performing assets of less than 3 per cent for the banking industry, the regulatory amendment allowing ARCs to acquire Special Mention Accounts (SMAs) has been a tailwind for ARCs.