ARCs to see better recovery rates in retail stressed assets next fiscal
Asset Reconstruction Companies (ARCs) are expected to see an improvement in the redemption rate of Security Receipts (SRs) issued for stressed retail assets in the next financial year, a new report said on Tuesday.
According to a Crisil report, the cumulative redemption rate is likely to increase by approximately 600 basis points (BPS), reaching 69-71 per cent.
This improvement is primarily driven by better recoveries from low-vintage accounts and high settlement rates across secured and unsecured asset classes.
Recent regulatory changes in settlement guidelines are also expected to support faster recoveries.
An analysis of a retail SR portfolio worth around Rs 19,000 crore, consisting of both secured and unsecured stressed debt, indicates that recoveries are improving due to an increasing proportion of low-vintage borrowers.
The share of such borrowers, categorised as Special Mention Accounts (SMA), has risen from about 5 per cent in FY23 to nearly 25 per cent in FY24.
These borrowers are easier to reach, and collections require lower operational efforts compared to those with older, deep-vintage loans.
As a result, ARCs have been able to recover the full principal outstanding (POS) in many cases, as per the report.
In the secured loan category, which includes home loans and loans against property, a strong asset coverage ratio has encouraged borrowers to settle their dues.
Data from the secured SR portfolio shows that borrowers with asset coverage of nearly twice the loan amount have been able to settle their loans above POS.
In other cases, settlements have been around 90 per cent of the outstanding principal. Faster settlement in these cases leads to quicker redemption of SRs, benefiting ARCs.
For unsecured loans, excluding microfinance, borrowers’ willingness to maintain a good credit score and remain eligible for fresh loans has contributed to higher settlements.
A study of five lakh accounts in the unsecured portfolio revealed that the cumulative closure rate till FY24 was 7.3 per cent among working-age borrowers, compared to just 4.7 per cent for others.
While recoveries are improving, the Reserve Bank of India (RBI) has tightened regulatory oversight on ARCs, the report said.
In January 2025, the RBI allowed ARCs to create their own Board-approved policies for settlement of dues.
This change allows the Independent Advisory Committees (IACs) of ARCs to focus only on large borrowers.
Small-ticket loans, those under Rs 1 crore, can now be settled outside the IAC framework, significantly reducing the operational burden for ARCs.
