What are Asset Reconstruction Companies (ARCs)?

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What are Asset Reconstruction Companies (ARCs)? Blog Image

Overview:

The Reserve Bank of India (RBI) recently released a master direction for asset reconstruction companies (ARCs).

About Asset Reconstruction Companies (ARCs)

  • An ARC is a specialized financial institution that purchases the bad debts of a bank at a mutually agreed value and attempts to recover those debts or associated securities by itself.
  • ARCs are registered undertheRBI and regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002).
  • They function under the supervision and control of the RBI.
  • As per the RBI, ARC performs the functions namely Acquisition of financial assets, Change or takeover of Management or Sale or Lease of Business of the Borrower, Rescheduling of Debts, Enforcement of Security Interest and Settlement of dues payable by the borrower.
  • ARCs take over a portion of the bank's debts, which qualify as Non-Performing Assets (NPAs). Therefore, ARCs are involved in the business of asset reconstruction, securitisation, or both.
  • All the rightspreviouslyheld by the lender (the bank) in regard to the debt are transferred to the ARC.
  • The required funds to purchase such debts can be raised from Qualified Buyers.
    • Qualified Buyers include Financial Institutions, Insurance companies, Banks, State Financial Corporations, State Industrial Development Corporations, trustee or ARCs registered under SARFAESI and Asset Management Companies registered under SEBI that invest on behalf of mutual funds, pension funds, FIIs, etc.
    • The Qualified Buyers are the only persons from whom the ARC can raise funds.

Asset Reconstruction vs. Securitization

  • Asset Reconstruction refers to the acquisition of any right or interest of a bank or financial institution in loans, advances, debentures, bonds, guarantees, or any other credit facility extended by banks for the purpose of recovering the funds.
  • These loans, advances, bonds, guarantees, and other credit facilities are collectively referred to as 'financial assistance.'
  • Securitization, on the other hand, means the acquisition of financial assets through the issuance of security receiptsto Qualified Buyers or other means. These security receipts represent an undivided interest in the financial assets.

Q1: What is a Non-Performing Asset (NPA)?

A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. They can include various types of loans, such as personal loans, business loans, mortgages and credit card debt. When the ratio of NPAs in a bank's loan portfolio rises, its income and profitability fall, its capacity to lend falls and the possibility of loan defaults and write-offs rise.

Source: RBI's compiled master direction on ARCs to be effective from April 24