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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.

News Source: Livemint

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