EDEN IAS

NEWS IMPULSE |RBI REPORT ON ASSET RECONSTRUCTION COMPANIES| 29 APRIL

Syllabus Section: Economy

Why in News?

  • According to a Reserve Bank of India (RBI) report on ARCs, the growth of the ARC industry has not been consistent over time and not always been synchronous with the trends in non-performing assets (NPAs) of banks and non-banking financial companies (NBFCs).
  • It supported the government’s proposal for a new ARC,

About:

ASSET RECONSTRUCTION COMPANY (ARC)

  • 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.
  • An ARC is incorporated under the Companies Act and registered with Reserve Bank of India under section 3 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
  • An asset reconstruction means acquisition by an ARC of any right or interests of any Bank or Financial Institution in any financial assistance for the purpose of realisation of such financial assistance.
  • This helps banks to concentrate in 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.

Background:

  • The ARC industry began with the establishment of the Asset Reconstruction Company India Ltd (ARCIL) in 2003
  • After remaining subdued in the initial years of their inception, a jump was seen in the number of ARCs in 2008, and then in 2016.
  • The number of ARCs has risen over time, their business has remained highlyconcentrated
  • There has been a concentration in the industry in terms of Assets Under Management (AUM) and the Security Receipts (SRs) issued.
  • During 2019-20, asset sales by banks to ARCs declined.
  • It could probably be due to banks opting for other resolution channels such as IBC and SARFAESI.

About New ARC:

  • The ARC proposed in the Budget will be set up by state-owned and private sector banks, and there will be no equity contribution from the Centre.
  • The introduction of a new ARC for addressing the NPAs of public sector banks may also shape the operations of the existing ARCs.
  • There is a definite scope for the entry of a well-capitalised and well-designed entity in the Indian ARC industry. Such an entity will strengthen the asset resolution mechanism further.

Source: Indian Express

 

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