ARCs shift focus as retail NPAs rise: India Ratings

The composition of asset class in the retail security receipts (SRs) issued by asset reconstruction companies (ARCs) has changed with unsecured personal and vehicles loans dominating the issuances in 2022, India Ratings and Research (Ind-Ra) said.

The rating agency analysed its overall rated retail portfolio of SRs issued by ARCs over 2012-2022. The portfolio comprises SRs worth Rs 5500 crore, backed by an underlying debt of Rs 11,500 crore as of September 30 2022.
In the first nine months of 2022, the agency rated portfolio had 68% of the issuances across non-mortgage asset classes dominated by vehicle pools (43%) and personal loan (18%) pools compared to 46% during 2021.

Home loans and loan against property which constituted 54% of the portfolio in 2021 has dropped to 32% in 2022.
The rating agency said that distress among retail borrowers since the outbreak of COVID-19 pandemic has led to an increase in the non-performing loans (NPLs) within the banking sector, which has led to an increase in the retail NPL portfolios of ARCs. The agency observes this to be in line with the rise in issuance volumes across asset classes in its rated portfolio.

Ind-Ra ARCs are offering a higher SR price for recent vintage issuances with mortgage portfolio still performing better under retail segment.

"Rising demand in retail space across ARCs with National Asset Reconstruction Company Limited now being setup as a special purpose ARC....Ind-Ra’s analysis shows that the weighted average SR acquisition pricing for mortgage pools is in the range of 50%-70% in recent vintages from 25%-35% in earlier vintages," indicating the higher chances of recovery in this portfolio the rating agency said.

SRs backed by mortgage loans have achieved the highest average cumulative recovery in the range of 90%-100% of the principal outstanding, while non-mortgage loan trusts’ recovery has varied in the range 20%-40% of principal outstanding and has been dependent on the underlying pool of borrowers and asset classes.

The rating agency expects digitisation and technology to play an important role in acquisitions and recovery performance, specifically in unsecured asset class with small ticket loans spread across geographies. ARCs with enhanced and improved digital capabilities can optimise and reduce their fixed costs and service the portfolios in a much efficient manner.