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.

News Source: Livemint