CrackitToday App

Asset Reconstruction Companies (ARCs): RBI

Asset Reconstruction Companies (ARCs): RBI

A Reserve Bank of India (RBI) committee has come out with a host of suggestions in a bid to streamline the functioning of Asset Reconstruction Companies (ARCs).

  • The performance of the ARCs has so far remained lacklustre, both in ensuring recovery and in revival of businesses.
  • Lenders could recover only about 14.29% of the amount owed by borrowers in respect of stressed assets sold to ARCs in the 2004-2013 period.
  • To improve the performance of ARCs, the RBI had appointed the committee (headed by Sudarshan Sen) to examine the issues and recommend measures for enabling ARCs to meet the growing requirements of the financial sector.

Asset Reconstruction Companies (ARCs):

  • It is a specialized financial institution that buys the Non Performing Assets (NPAs) from banks and financial institutions so that they can clean up their balance sheets.
  • A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • Typically, ARCs buy banks’ bad loans by paying a portion as cash upfront (15% as mandated by the RBI), and issue security receipts (SRs) for the balance (85%).
  • This helps banks to concentrate on normal banking activities. Banks, rather than going after the defaulters by wasting their time and effort, can sell the bad assets to the ARCs at a mutually agreed value.
  • The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up of ARCs in India.
  • The Act helps reconstruction of bad assets without the intervention of courts. Since then, a large number of ARCs were formed and were registered with the RBI.
  • RBI has got the power to regulate the ARCs.