According to a Reserve Bank of India (RBI) report on Asset Reconstruction Companies (ARCs), the growth of the ARC industry has not been consistent over time and not always been synchronous with the trends in non-performing assets (NPAs) of banks and non-banking financial companies (NBFCs).
GS-III: Indian Economy (Growth and Development of Indian Economy, Mobilization of Resources)
Dimensions of the Article:
- What is an Asset Reconstruction Company?
- Asset reconstruction and the process
- Highlights RBI’s report on Growth of the ARC Industry
- Issues with Indian ARCs
- RBI on the New ARC
What is an Asset Reconstruction Company?
- An asset reconstruction company is a special type of financial institution that buys the debtors of the bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.
- The asset reconstruction companies or ARCs are registered under the RBI. Hence, RBI has the power to regulate the ARCs.
- ARCs are regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002).
- The ARCs take over a portion of the debts of the bank that qualify to be recognised as Non-Performing Assets. Thus, ARCs are engaged in the business of asset reconstruction or securitization (securitization is the acquisition of financial assets either by way of issuing security receipts to Qualified Buyers or any other means) or both.
- All the rights that were held by the lender (the bank) in respect of the debt would be transferred to the ARC. The required funds to purchase such such debts can be raised from Qualified Buyers.
- The ARC can take over only secured debts which have been classified as a non-performing asset (NPA). In case debentures / bonds remain unpaid, the beneficiary of the securities is required to give a notice of 90 days before it qualifies to be taken over.
Asset reconstruction and the process
Asset Reconstruction – It is the acquisition of any right or interest of any bank or financial institution in loans, advances granted, debentures, bonds, guarantees or any other credit facility extended by banks for the purpose of its realisation. Such loans, advances, bonds, guarantees and other credit facilities are together known by a term – ‘financial assistance’.
Process of Asset Reconstruction
The main intention of acquiring debts / NPAs is to ultimately realise the debts owed by them. However, the process is not a simple one. The ARCs have the following options in this regard:
- Change or takeover of the management of the business of the borrower.
- Sale or lease of such business.
- Rescheduling the payment of debts – offering alternative schemes, arrangements for the payment of the same.
- Enforcing the security interest offered in accordance with the law.
- Taking possession of the assets offered as security.
- Converting a portion of the debt into shares.
Highlights RBI’s report on Growth of the ARC Industry
- The ARC industry began with the establishment of the Asset Reconstruction Company India Ltd (ARCIL) in 2003.
- After remaining subdued in the initial years of their inception, a jump was seen in the number of ARCs in 2008, and then in 2016.
- There has been a concentration in the industry in terms of Assets Under Management (AUM) and the Security Receipts (SRs) issued.
- The growth in ARCs’ AUM has been largely trendless except for a major spurt in FY14.
- The AUM of ARCs has been on a declining trend when compared with the volume of NPAs of banks and NBFCs, except during the period of high growth in the AUM around 2013-14.
- During 2019-20, asset sales by banks to ARCs declined, which could probably be due to banks opting for other resolution channels such as Insolvency and Bankruptcy Code (IBC) and SARFAESI.
Issues with Indian ARCs
- Indian ARCs have been private sector entities registered with the Reserve Bank. Public sector AMCs in other countries have often enjoyed easy access to government funding or government-backed. The capital constraints have often been highlighted as an area of concern for ARCs in India.
- Despite the regulatory push to broaden, and thereby enhance, the capital base of these companies, they have remained reliant primarily on domestic sources of capital, particularly banks.
- Banks supply NPAs to the ARCs, hold shareholding in these entities and also lend to them, which makes it necessary to monitor if there is a “circuitous movement of funds between banks and these institutions”.
RBI on the New ARC
- The movement in asset quality of banks and NBFCs following the Covid-19 pandemic could bring ARCs into greater focus and action.
- The ARC proposed in the Budget will be set up by state-owned and private sector banks, and there will be no equity contribution from the Centre.
- 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 remain unresolved in around 70 large accounts.
- The introduction of a new ARC for addressing the NPAs of public sector banks may also shape the operations of the existing ARCs.
- There is a definite scope for the entry of a well-capitalised and well-designed entity in the Indian ARC industry. Such an entity will strengthen the asset resolution mechanism further.
-Source: Indian Express