ARCs’ Security Receipt redemptions improve in FY24, says Association

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The consideration paid for acquiring stressed assets and redemption of security receipts (SRs) by asset reconstruction companies (ARCs) improved in FY24, even as these entities plan to take up issues facing them at their upcoming meeting with the RBI.

In FY24, ARCs acquired bad loans from lenders, aggregating around ₹1.57-lakh crore, according to provisional estimates from the Association of ARCs in India.

In FY23, the acquisition was higher at ₹2.10 lakh crore as it included the one-time assignment of Yes Bank’s bad loans totalling ₹48,000 crores to JC Flowers ARC.

In FY24, the issuance of Security Receipts (SR) — the purchase consideration paid for acquiring these assets — was over ₹43,000 crore (₹41,000 crore in FY23), and SRs redeemed were over ₹33,000 crore (₹27,000 crore), per the estimates.

The sale of stressed assets to ARCs is one of the channels for their resolution for lenders. This is done either through a combination of cash payments and the issue of security receipts (SRs) or all cash transactions. The number of 27 ARCs registered with the Reserve Bank of India (RBI) stood at 27 as of March 2024.

Redemption Rise

“ARCs acquired total dues over ₹10-lakh crore by March 2024 since inception (in 2002). The redemption performance of ARCs, which used to be a major concern, has been showing consistent improvement. From ₹10,000 crore SR redemption in 2019, now it has risen over three times to ₹33,000 crore,” said Hari Hara Mishra, CEO, Association of ARCs in India.

He observed that ARCs are now better capitalised. Thanks to good recoveries, they are better positioned to play a more effective role in NPA (non-performing asset) resolution.

“They need some regulatory support, such as allowing retail HNI (high net worth individual) participation in SRs. Like equity markets and mutual funds, which are more liquid today with retail participation, the distressed debt market will also have more liquidity and depth,” Mishra said.

He emphasised that banks prefer NPA sale to ARCs as it provides them with a quick exit compared to recovery from legal measures, which are time-consuming and by which time there is significant value erosion.

Referring to the upcoming conference of directors and chiefs of ARCs with RBI, Mishra said “The conference will give ARCs a better understanding of regulatory expectations and concerns, while giving an opportunity to the Companies to represent the problems faced by them. This will be RBI’s first such meet for the ARC sector.”