What is an ARC?
- An Asset Reconstruction Company is a specialized financial institution that buys the non-performing assets (NPA) or bad assets from banks and financial institutions so that the latter can clean up their balance sheets. Or in other words, ARCs are in the business of buying bad loans from banks.
- ARCs clean up the balance sheets of banks when the latter sells these to the ARCs. 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.
Objective of ARCs
- Rapid growth of bad debts/ non-performing assets was the chronic hurdle for healthy growth of Indian economy.
- According to RBI’s Financial Stability Report (FSR), banks non-performing assets may rise to as high as 14.8% in one year in case of a severe stress scenario, from 7.5% as of September 2020.
- ARCs acquire the bad debts/NPA accounts from Banks and Financial Institutions and try to resolve expeditiously by availing remedies under existing laws of India.
- ARCs are incorporated under the Companies Act and registered with Reserve Bank of India under section 3 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
- ARCs function under the supervision and control of the Reserve Bank of India.
SARFAESI Act 2002– origin of ARCs
- The SARFAESI Act 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 which has got the power to regulate the ARCs.
- After enactment of SARFAESI Act in 2002, regulatory guidelines for ARCs were issued in 2003 to enable development of this sector and to facilitate smooth functioning of ARCs.
- Since then, while ARCs have grown in number and size, their potential for resolving stressed assets is yet to be realised fully.
Why in News?
- The RBI has set up a six-member committee to undertake a comprehensive review of the working of asset reconstruction companies and recommend suitable measures for enabling them to meet the growing requirements.
- As per the terms of reference of the committee, the panel will review the existing legal and regulatory framework applicable to ARCs and recommend measures to improve efficacy of ARCs.
- Besides, it has also been asked to review business models of the ARCs.