Asset Reconstruction Companies (ARCs)

The RBI has set up a committee headed by Sudarshan Sen to undertake a comprehensive review of the working of asset reconstruction companies (ARCs) in the financial sector ecosystem and recommend suitable measures for enabling them to meet the growing requirements.

Terms of Reference of the Committee

  • To review the existing legal and regulatory framework applicable to ARCs and recommend measures to improve efficacy of ARCs.
  • To review the role of ARCs in the resolution of stressed assets, including under the Insolvency and Bankruptcy Code (IBC), and give suggestions for improving liquidity in and trading of security receipts.
  • It will also review the business models of ARCs.

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.
  • The asset reconstruction companies or ARCs are registered under the RBI.

Legal Basis

  • 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 SARFAESI 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 Reserve Bank of India (RBI) which has got the power to regulate the ARCs.

Capital Needs for Asset Reconstruction Company

  • As per amendment made in the SARFAESI Act in 2016, an ARC should have a minimum net owned fund of Rs. 2 crores.
  • The RBI raised this amount to Rs. 100 crores in 2017. The ARCs also have to maintain a capital adequacy ratio of 15% of its risk weighted assets.

What is the need for new ARCs in India?

  • Many of the existing Asset Reconstruction Companies do not have sufficient capital to help the banks clear the debt and over the loss faced by NPAs. Thus, setting up new ARCs with proper capitalisation can benefit both the banks and the economic condition of the country.
  • If ARCs are set and start functioning well, the stressed assets in the banking sector may reduce drastically. This structure will reduce a load of stressed assets on the bank balance sheet and look to resolve these bad debts in a market-led way.

Union Budget 2021-22

  • Finance Minister Nirmala Sitharaman announced the setting up of Asset Reconstruction Companies in India to take care of Non-Performing Assets (NPAs) of stressed banks.
  • ARCs in India shall be set up by state-owned and private sector banks, as proposed.
  • There will be no equity contribution from the government.

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