Asset reconstruction companies (ARCs) are likely to see the cumulative redemption rate of security receipts (SRs) issued for stressed retail assets improve by about 600 basis points (bps) to 69-71 per cent next fiscal, from an estimated 65 per cent in FY25, according to Crisil Ratings.
Cumulative redemption rate is the cumulative net recoveries as a percentage of cumulative security receipts issued.
The rating agency assessed that improving redemptions will be driven by two factors: healthy recoveries from low-vintage accounts, and healthy settlement rates (the amount mutually agreed by the ARC and borrower to be paid against outstanding principal debt) across secured and unsecured asset classes.
Additionally, recent regulatory changes in settlement guidelines should also support faster recoveries going forward.
The rating agency said an analysis of its rated retail SR portfolio, comprising ₹2,000 crore of stressed secured debt and ₹ 17,000 crore of unsecured stressed debt acquired indicates as much.
Crisil Raings observed that an increase in the proportion of low-vintage or Special Mention Account (SMA) borrowers — also reflected in its rated SR portfolio — from 5 per cent in fiscal 2023 to 25 per cent in fiscal 2024 — is driving recoveries up.
For these, ARCs have seen a recovery of the full principal outstanding or POS due to better accessibility and lower operational intensity for collections as compared to deep vintage borrowers.
Mohit Makhija, Senior Director, Crisil Ratings, said: “The improvement in redemption rate will differ asset class wise. The cumulative redemption rate for secured loans is expected to improve by 1,200 bps next fiscal, much higher than the 700 bps for unsecured loans.
“Having said that, the recent trend of under-recovery in the microfinance sub-segment would likely cap the improvement in redemption rates for the unsecured segment going forward.”
The agency noted that for secured asset classes such as home loans and loans against property, healthy underlying asset coverage brings borrowers to the table for settlement.
“With improving asset coverage, settlement rates for secured loans have seen an uptick. This is also reflected in our rated secured SR portfolio, where borrowers with 2x asset coverage have settled above POS, while in other instances they were at 90 per cent of POS.
“For ARCs, settlements at above or near POS are the best-case outcomes as they result in faster redemption of SRs,” the agency said.
Unsecured loans
Crisil Ratings noted that for unsecured loans other than microfinance, the intent of borrowers to improve their credit scores and maintain eligibility for fresh loans plays a crucial role in their willingness to settle outstanding debt, and that will continue to drive recoveries.
An analysis of 5 lakh accounts in Crisil’s rated unsecured portfolio reveals the cumulative closure rate (cumulative number of accounts closed upon total number of accounts in that category) till fiscal 2024 in working-age borrowers (21-60 years) was 7.3 per cent against just 4.7 per cent for other borrowers.
Microfinance
On the other hand, in the microfinance segment of the rated SR portfolio, growth in the cumulative redemption rate is likely to moderate to 700 bps from earlier expectations of 1400 bps for fiscal 2026 because of over-leveraged borrowers.
The agency said while recoveries are improving across asset classes, regulatory oversight of ARCs has been tightened by the Reserve Bank of India (RBI).
Regulatory changes
Further, in January 2025, the RBI allowed ARCs flexibility to frame a board-approved policy for settlement of dues by borrowers.
Crisil said this effectively allows the Independent Advisory Committees (IACs) of ARCs to focus on approval of settlement with large borrowers only. Small-ticket borrowers (loans < Rs 1 crore) can now be dealt outside IAC, which will reduce the operational intensity of ARCs significantly.
Sushant Sarode, Director, Crisil Ratings, said: “The recent regulatory announcement acts as a welcome move for ARCs, bringing flexibility for settlement of small ticket size loans.
“This should speed up the approval process, reduce incidental costs and improve recovery rates for small-ticket loans, which had slowed in the past 6-9 months. These small-ticket loans comprise 40-50 per cent of our rated retail SRs.”
The agency said with ARCs diversifying into the retail segment, their adaptability to changing regulations will bear watching.
