Assets under management of asset reconstruction companies (ARCs) have declined due to fewer loan defaults and reduced corporate lending. In the June quarter, AUM fell by Rs 2,632 crore, with outstanding security receipts dropping from Rs 1.4 lakh crore in March to Rs 1.37 lakh crore in June. Crisil projects a further shrinkage this fiscal year.
This news has stirred a mix of emotions among investors and financial analysts. To put this development into perspective, asset reconstruction companies or ARCs are specialized financial institutions established in India with the primary objective of offloading non-performing assets from banks and other financial institutions. By doing so, ARCs allow these institutions to make fresh lending while concurrently boosting economic activities.
Currently, ARCs hold security receipts, either partially-rated or unrated. With fewer loan defaults recorded in Q1 and fewer acquisitions made by ARCs during the quarter, asset quality concerns still prevail. It also signifies a trend of reduced debt resolution in the industry.
The sharp decline in AUM during the quarter is also reflective of the lower levels of provisioning, as Indian banks cleared a substantial portion of their bad debt in the previous years. This cleaned-up books for several Indian banks and reduced their dependency on the ARCs for asset reconstruction.
Research and ratings firm Crisil further affirms this stance, stating that it expects the industry to witness a contraction in AUM. This will continue, as more retail loans turn non-performing in the system. Crisil’s prediction raises critical questions and sparks concerns about the future of ARCs and their influence in India’s economy.
As the economic landscape continues to evolve, investors and analysts are left wondering whether ARCs would turn things around in the coming quarters. However, what seems like a challenge currently could be an opportunity waiting to be tapped. A correction in the ARC model may make way for new forms of resolution. Innovations and collaborations would become particularly essential in strengthening the sector.