ASSET RECONSTRUCTION COMPANIES

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A Reserve Bank of India (RBI) committee has come out with a host of suggestions in a bid to streamline the functioning of Asset Reconstruction Companies (ARCs).

Asset Reconstruction Companies (ARCs)

• It is a specialized financial institution that buys the Non Performing Assets (NPAs) from banks and financial institutions so that they can clean up their balance sheets.
• A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
• Typically, ARCs buy banks’ bad loans by paying a portion as cash upfront (15% as mandated by the RBI), and issue security receipts (SRs) for the balance (85%).
• This helps banks to concentrate on 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.
• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 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.
• RBI has got the power to regulate the ARCs.

Important points:

• The performance of the ARCs has so far remained lacklustre, both in ensuring recovery and in revival of businesses.
• Lenders could recover only about 14.29% of the amount owed by borrowers in respect of stressed assets sold to ARCs in the 2004-2013 period.
• To improve the performance of ARCs, the RBI had appointed the committee (headed by Sudarshan Sen) to examine the issues and recommend measures for enabling ARCs to meet the growing requirements of the financial sector.
• Recognising the need for transparency and uniformity of processes in sale of stressed assets to ARCs, the Committee feels that an online platform may be created for sale of stressed assets.
• The scope of Section 5 of the SARFAESI Act may be expanded to allow ARCs to acquire ‘financial assets’, for the purpose of reconstruction, not only from banks and ‘financial institutions’ but also from such entities as may be notified by the RBI.
• ARCs are to be allowed to sponsor SEBI-registered Alternative Investment Funds to raise resources for facilitating restructuring of bad loans purchased by them.
• Envisaging ARCs as a prime vehicle for resolution of stressed assets, the regulations should allow ARCs to also use the Insolvency and Bankruptcy Code (IBC) framework for this purpose.
• Large loans and loans that have been in default for over two years should be considered for sale to ARCs by banks. Final approval of the reserve price should be given by a high-level committee.
• Reserve price plays a critical role in ensuring true price discovery in auctions conducted for sale of stressed assets.

SOURCE: THE HINDU,THE ECONOMIC TIMES,MINT