Assets under management (AUM) of asset reconstruction companies (ARCs) is expected to grow almost 10% this fiscal to Rs 1,19,000 crore after a period of relative stagnation, according to a Assocham-Crisil Ratings report released on Thursday.

ARCs have been facing headwinds in the past three fiscals, with growth in AUM, as measured by security receipts (SRs) outstanding, dropping to low single digits in the past four years.

The period between fiscals 2014 and 2018 had seen the AUM grow at a steady pace as it climbed from Rs 42,000 crore to Rs 95,000 crore. This was initially driven by the supportive regulatory environment for banks to sell bad assets, the report said.

In FY19, the AUM of ARCs grew 8% to Rs 1,03,000 crore and stayed flat the next year. 

The fiscals between 2020 and 2022 saw a slowing of the AUM as it rose from Rs 1,03,000 crore to Rs 1,09,000 crore 

The slowdown is partly attributable to the subdued macroeconomic environment, which had hindered consummation of deals and heightened risk aversion among investors, leading to lower acquisition. A few structural trends are also at play, the report said.

First, the stressed asset ecosystem has undergone a transformation. Lenders now have multiple options for resolution and enforcement frameworks, and are evaluating and utilising these options more actively. IBC, with its subsequent modifications, has seen many takers. The RBI’s June 2019 Prudential Framework for Resolution of Stressed Assets gives lenders the option to resolve stressed assets outside the legal process. So, an ARC may not necessarily be the first port of call for lenders. 

Second, due to the stringent provisioning norms, banks prefer to retain only a limited share of SRs for assets sold. At the same time, given the limited capital availability, ARCs in most cases hold only the regulator-mandated 15% of SRs. This gap has to be bridged by bringing in external co-investors. This did happen in a few large assets and ARCs did partner with external investors. However, the trend has not been widespread across the sector since not all ARCs have been able to bring in co-investors; co-investors have also been selective. 

Crisil Ratings expects the growth of ARCs to touch a 5-year high this fiscal to Rs 1,19,000 crore. 

The market has seen a large transaction for acquisition of a portfolio of non-performing assets (NPAs) from a bank. The setting up of the National Asset Reconstruction Company Ltd (NARCL) also kick-started the acquisition of NPAs with its first transaction in January 2023, and this should pick up pace further going forward, the report said.