Asset Reconstruction Companies (ARCs)

• Asset Reconstruction Companies (ARCs) are specialized financial institutions that purchase Non-Performing Assets (NPAs) or bad loans from banks and financial institutions. 
• The main objective is to clean up the balance sheets of banks so they can focus on their core lending operations, while ARCs take on the task of recovering or restructuring the bad assets.

Genesis:

• The idea of ARCs was first proposed by the Narasimham Committee-II (1998).
• The legal framework for ARCs was established through the SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act).
• Asset Reconstruction Company (India) Limited (ARCIL) was India’s first ARC.
• Recently, the government launched the National Asset Reconstruction Company Limited (NARCL) in 2021 to deal with large-scale NPAs.

Main Functions of ARCs:

• Acquisition of NPAs: ARCs buy bad loans from banks at a discounted rate.
• Issue of Security Receipts (SRs): These are issued to Qualified Institutional Buyers (QIBs) to raise funds.
• Loan Restructuring: ARCs restructure loans to make them repayable by the borrower.
• Asset Recovery or Sale: Recover the dues from borrowers or sell the asset to third parties.

Functioning:

• Banks sell NPAs to ARCs at a discount.
• ARCs issue Security Receipts (SRs) to investors against these assets.
• ARCs are required to resolve these assets within 8 years and redeem the SRs.

Key Provisions:

• Net Owned Fund (NOF): Minimum of ₹300 crore is required to start operations.
• Registration: ARCs must obtain a Certificate of Registration (CoR) from the Reserve Bank of India (RBI).
• Capital Adequacy: ARCs must maintain a Capital Adequacy Ratio of at least 15%.
• Leadership Guidelines: Maximum age for MD/CEO is 70 years, with a term of 5 years at a time and a maximum of 15 years continuously.
• Internal Audit: ARCs must implement a system for periodic checks and reviews of acquisition and recovery procedures.
• Prohibited Activities: ARCs are not allowed to raise public deposits.

Role of RBI:

• ARCs are regulated by the Reserve Bank of India (RBI).
• RBI monitors their operations and issues necessary guidelines for transparency and efficiency.

Importance of ARCs:

• Bank Relief: Helps banks reduce NPA burden.
• Improved Efficiency: Allows banks to focus on their core functions.
• Economic Growth: Enhanced capital flow and recovery aids economic revival.
• Stability: Ensures financial stability by managing bad debts systematically.

Challenges:

• Lengthy Recovery Process: Legal and bureaucratic delays.
• Asset Valuation Issues: Difficulty in pricing stressed assets correctly.
• Investor Interest: Needs strong backing from investors for effective functioning.
• Low Recovery Rates: Often unable to recover significant value from distressed assets.

Recent Initiative – NARCL:

• Launched in 2021 as the government-backed ARC, also known as a "bad bank".
• Aimed at acquiring and resolving large ticket NPAs in a time-bound manner.