New Delhi: With the launch of the new One-time-settlement regulation in October last year, asset reconstruction companies have started following specific steps to ensure realisation. However, compliance with the new regulations may delay the recovery process by another 9-12 months, data analysed by a rating agency suggested.
According to the data analysed by India Ratings and Research, a Fitch Group rating agency, this has slowed down the pace of recovery, and the recovery timelines can get stretched by three to four quarters. India Ratings study showed that loan recoveries across retail loans, including housing and micro, small and medium enterprises, have seen a drag, proportioning 35% to the principal outstanding during the June-December 2022 review cycle.
According to the study, this was led by the protracted timelines of the settlement process, which was in addition to the slowdown in the process caused during the Covid-19 global pandemic. While the rating agency continues to monitor its rated portfolio of security receipts (SRs) alongside running a sensitivity analysis on the recovery timelines, it has observed no major rating migration. However, the impact of the regulation could be seen in the upcoming surveillance cycles.
Impact seen across recovery timelines
According to the rating agency’s analysis, there is a slowdown in the recovery timelines for its rated security receipts backed by non-performing mortgage loan pools in the recent vintages compared to earlier vintages.
India Ratings said it was because the new norms under the One-time-settlement (OTS) scheme require an independent advisory committee to examine all settlement of dues with borrowers including retail, SME and MSME loans. As per the new settlement norms, all the methods of recoveries shall have to be exhausted before a settlement process takes place.
Settlement or staggered payment most preferred mode
As per the agency’s discussion with the asset reconstruction companies (ARCs), for retail loans backed security receipts, settlement or staggered payments were the most preferred method of recovery in the past as it would increase the recovery amount and reduce the costs associated with repossession and foreclosure.
However, India Ratings said, though the quantum of recovery might not be affected, there shall be a delay in the timelines to recovery by 9 to 12 months. During the Covid-19 pandemic, asset recovery companies faced a drag in recovery values and timelines which resulted in a negative rating transition. The ratio of downgrades to upgrades for the agency-rated retail loans was 1.75 times during the December 2022 review, compared with 1.5 times during June 2022 review and 1.25 times during the December 2021 review.
“With the operating environment returning to normalcy, downgrades were projected to slow down in the upcoming quarters. However, the OTS guidelines could be one of the factors facilitating a drag in the ratings thereby momentarily increasing the downgrade to upgrade ratio,” it said in a statement.
Although the recovery could slow down for asset reconstruction companies in the near-medium term, the guidelines could benefit counterparties to security receipt transactions in the longer term amid the growing requirements of the financial sector. According to the agency assessment, now asset reconstruction companies can tap their unused potential to resolve stressed assets, while the one-time-settlement process will also enhance transparency and bring consistency to the settlement processes.
