Yet another ARC to shut shop, this time an Aditya Birla joint venture

Mumbai: Aditya Birla Asset Reconstruction Company (ARC), a joint venture between Aditya Birla Capital and Varde Partners, is winding down its India operations, marking the latest in a series of fund-backed ARCs exiting the country.

The move follows recent exits by Arcion Revitalization - a JV between Apollo Global and ICICI Bank - and Lone Star India, underscoring the increasing challenges in India's ARC sector as non-performing loans (NPLs) hit a 12-year low.

This decline is largely credited to India's 2016 Insolvency and Bankruptcy Code (IBC) and the rise of the government-backed National Asset Reconstruction Company (NARCL).


Launched in 2018, Aditya Birla ARC will manage its existing portfolio but will no longer pursue new acquisitions of distressed assets, according to sources close to the matter.

Several private ARCs face obstacles as banks increasingly prefer NARCL's terms, which offer a 15% cash component and 85% in government-backed security receipts (SRs), a structure that reduces risk for lenders. In contrast, private ARCs have to mostly bid with 100% cash.

An Aditya Birla Capital spokesperson did not immediately respond to a request for comment.

While the decline in bad loans has brought down the availability of distressed assets, the primary source for ARCs, the IBC has incentivised early settlements by promoters, further reducing distressed asset opportunities.

Besides, increased regulatory oversight and rise in networth requirement are taking away the sheen.

Following a surge in 2018, when five global fund-backed ARCs, including Bain-Piramal's India Resurgent Fund and Lone Star, entered the market, ARC licensing slowed considerably. Since then, only two licences have been issued - to NARCL and Shriram Capital. Most of the 2018 entrants have since exited or become inactive, with Lone Star surrendering its licence in December 2022 and Arcion in August 2023.

Investor interest has shifted from ARC equity to SR transactions, with investments in SR rising from ₹500 crore in 2017 to ₹30,000 crore in 2023. Investors are increasingly opting for single SR trades rather than long-term ARC investments. In recent quarters, SR redemptions have exceeded issuances, with ₹6,310 crore redeemed in the June quarter and ₹6,852 crore in the September quarter, compared to issuances of ₹3,600 crore and ₹4,700 crore, respectively.

This has resulted in negative AUM for ARCs, according to data collated by the Association of ARCs in India.

However, there is an increase in bad loans in segments like unsecured retail and microfinance loans, which may lead to opportunities for ARCs in the coming years.

"On a long-term perspective, the Indian NPL market with stressed assets across segments and various ticket sizes, has the potential to become a global NPL supermarket," said Hari Hara Mishra, CEO of the Association of ARCs in India. "There is a growing interest by investors in Indian economy in general and distressed assets with ARCs as prime vehicle. Enhanced transparency and disclosures at ARCs post ARC sector reforms in 2022 are enablers to inspire investor confidence. However, some elevated level of regulatory cholestrol needs to come down."