Recoveries by asset reconstruction companies (ARCs) across retail loans such as housing and MSME slowed, proportioning 35 per cent to the principal outstanding, during June-December 2022, India Ratings and Research said in a note.

This is because post the launch of one-time settlement (OTS) regulations in October 2022, ARCs started following measured steps to ensure realisations, which led to protracted timelines of the settlement process, in addition to the pull down seen during the Covid-19 pandemic.

“This has slowed down the pace of recovery, and the recovery timelines can get stretched by three to four quarters,” the rating agency said, adding that while there has been no significant rating migration in its rated portfolio of security receipts (SRs) so far, the impact of the regulation could be seen in the upcoming cycles.

The prescribed norms require an independent advisory committee to examine all settlement of dues with borrowers including retail, SME and MSME loans. Further, all methods of recoveries are required to be exhausted before a settlement process can take place.

“As per the agency’s discussion with ARCs, for retail loans backed SRs, settlement or staggered payments were the most preferred method of recovery for ARCs in the past as it would increase the recovery amount and reduce the costs associated with repossession and foreclosure.”

Even as the quantum of recovery might not be affected, there will be delays in the timelines to recovery by three to four quarters, it added.

With the operating environment returning to normalcy, downgrades are projected to slowdown in the coming quarters. However, the OTS guidelines could facilitate a drag in the ratings thereby momentarily increasing the downgrade to upgrade ratio. The ratio of downgrades to upgrades for the retail universe was 1.75x during the December 2022 review compared with 1.5x during the June 2022 review and 1.25x in December 2021.