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Higher cash, quicker resolution help improve redemption ratio for ARCs

The cumulative redemption ratio for security receipts (SRs) issued by asset reconstruction companies (ARCs) has improved to 44% in 2019 from a mere 3% in 2015 because of a higher proportion of cash transactions, quicker debt aggregation, and better economic value of non performing assrts (NPAs), rating agency Crisil said in a new study.

Resolution through the new insolvency and bankruptcy code has also quickened resolution process, the study said.

“The cumulative redemption ratio in the first three years of SRs issued in 2015 is merely 3%; however, the redemption ratio is 44% for the same time frame for SRs issued in 2019. This shows that recent acquisitions are faring better than the older ones due to a higher proportion of cash transactions, quicker debt aggregation, and lower vintage of NPAs with much better economic value,” Crisil said in a report commissioned by industry lobby group Assocham.

SRs are issued by ARCs to sellers of bad loans giving them a part of any upside from the recovery of the asset.

Crisil has been rating SRs issued by ARCs since 2003 and has rated SRs of over Rs 30,000 crore issued by over 450 trusts across sectors.

Higher share of cash transactions, better-quality assets, and quicker implementation of resolution has meant that the majority of SRs (61%) are higher rated versus 40% in 2016.

Cumulative recovery ratio has also improved to 42% post the Insolvency and Bankruptcy Code (IBC) from 6% to 20% in 2015. Redemption ratio or the ratio of SRs redeemed and SRs issued improved to 44% post IBC from 17% before the law came into force.

Crisil said over the last few years recoveries have improved because of higher cash based transactions especially through means like one time settlement,
acquisition of lower vintage of assets or more recent NPAs where chances of recoveries are higher and resolution through the IBC or because defaultors settled for the fear of losing their assets.

Crisil said for large debt of over Rs 100 crore, restructuring is the most preferred resolution strategy while for For mid-sized debt of Rs 50-100 crore, settlement of debt and sale of assets worked well. It smaller debt of Rs 50 crore and below, sale of assets was the best option.

However the rating agency listed lack of secondary market trading of SRs, capital challenges and prolonged resolution timelines due to legal delays among the challenges for ARCs.

Crisil said it expects private ARCs to continue to focus more on the retail and MSME segments, even as the government backed National Asset Reconstruction Co Ltd (NARCL) scales up in acquiring large corporate loans.

“ARCs are also likely to have a competitive edge in retail and MSME loans. Other investor classes such as stressed assets funds are unlikely to be interested in these segments since building an operationally intensive set-up to manage retail stressed assets will entail a significant investment,” the rating agency said.
Crisil expects that as retail asset acquisitions gather pace, the business models of ARCs will continue to evolve to tap the shifting business opportunity.

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