Asset Reconstruction Companies (ARCs)

July 26, 2023

GS Paper III Indian Economy

Context:

Due to the large number of available written-off loans with lenders and the government’s efforts to recover these loans, ARCs are utilizing the chance to purchase these loans.

About Asset Reconstruction Companies (ARCs):

Definition: It is a Specialized financial institution dealing with Non-Performing Assets (NPAs) in the banking sector.
Objective: Acquire and manage distressed assets from banks and financial institutions.
Underlying Act: The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis of an ARC.
Capital Needs for ARCs:
- Minimum Net Owned Fund: As per the 2016 amendment to the SARFAESI Act, ARCs should have a minimum Net owned fund of Rs. 2 crores.
  - In 2017, the RBI raised the minimum amount for ARCs to Rs. 100 crores.
- Capital Adequacy Ratio (CAR): ARCs are required to maintain a CAR of 15% of their risk-weighted assets.
NPA Acquisition: ARCs buy NPAs from banks at reduced prices, bringing liquidity and improving the balance sheet of the bank.
Benefits to Banks: Allows banks to offload NPAs, focus on core banking activities, and reduce the burden of bad loans.

Additional Information:

About National Asset Reconstruction Company Limited (NARCL):

In the Union Budget 2021, the government announced the formation of NARCL to address Non-Performing Assets (NPAs) in the banking industry.
It is a government entity incorporated on 7th July 2021, with majority stake held by Public Sector Banks and the remaining by Private Banks.
It is registered with the Reserve Bank of India as an Asset Reconstruction Company under the (SARFAESI) Act, 2002.
Objective: To aggregate and resolve NPAs in the banking industry.