Asset Reconstruction Company:
In the Budget 2021-22, Asset Reconstruction Company (ARC) has been proposed to be set up by state-owned and private sector banks, and there will be no equity contribution from the government.
- The ARC, which will have an Asset Management Company (AMC) to manage and sell bad assets, will look to resolve stressed assets of Rs. 2-2.5 lakh crore that remains unresolved in around 70 large accounts.
- This is being considered as the government’s version of a bad bank.
About the Asset Reconstruction Company (ARC):
- 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.
- This helps banks to concentrate in 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.
About the new ARC:
- Of the existing ARCs, only 3-4 are adequately capitalized, while the more-than-dozen remaining is thinly capitalized — necessitating the need to set up a new structure to resolve stressed assets urgently.
- In a report released by the Reserve Bank of India (RBI), it was said that banks’ gross non-performing assets may rise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario.
- The transfer of stressed assets to the ARC will happen at net book value, which is the value of assets minus provisioning done by banks against these assets. This could enable the banks to alleviate its losses from NPAs – a part of stressed assets.
- The bank will get 15% cash and 85% security receipts against bad debt that will be sold to the ARC.
- Security Receipts (SR) are issued by ARCs when Non-Performing Assets (NPAs) of commercial banks (CB) or financial institutions (FI) are acquired by the ARCs for the purpose of recovery.
- As per extant instructions, investment in SRs is restricted to the Qualified Institutional Buyers (QIBs), as defined by SARFAESI Act 2002.
- While the government will not provide any direct equity support to the ARC, it may provide sovereign guarantee that could be needed to meet regulatory requirements.