In today’s time, Asset Reconstruction Companies (ARCs) have gained increasing significance in India’s financial sector by assisting banks and other financial institutions in handling their Non-Performing Assets (NPA). ARCs are progressively becoming integral to the Indian economy, revitalising it and providing crucial support to the country’s financial sector. This article explains asset reconstruction, how ARCs operate and their advantages.
Asset Reconstruction Company: Meaning
An asset reconstruction company is a specialised financial institution that purchases the debtors of a bank at a mutually agreed value and endeavours to recover the debts or associated securities independently. These ARCs are registered under the Reserve Bank of India and regulated by the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002). ARCs assume responsibility for a portion of the debts held by the bank that qualify as Non-Performing Assets. As such, ARCs are involved in the business of asset reconstruction, securitisation, or both. All rights previously held by the lender (the bank) regarding the debt are transferred to the ARC. The necessary funds to purchase such debts can be sourced from Qualified Buyers.
What is asset reconstruction?
Asset reconstruction involves acquiring any rights or interests of a bank or financial institution in loans, debentures, bonds, advances granted, guarantees, or any other credit facility extended by banks for the purpose of realising them. Collectively, these advances, bonds, loans, guarantees, and other credit facilities are referred to as “financial assistance”.
Asset Reconstruction Company: Examples
Some of the existing ARCs in India, regulated by the Reserve Bank of India, include:
- Asset Reconstruction Company (India) Limited (ARCIL)
- Reliance Asset Reconstruction Company Limited
- ASREC (India) Limited
- International Asset Reconstruction Company Private Limited
- India SME Asset Reconstruction Company Limited (ISARC)
What does an Asset Reconstruction Company do?
As per the notification issued by the RBI on April 23, 2023, ARCs are permitted to undertake the following activities:
- Acquire financial assets
- Enforce security interests
- Reschedule debts
- Settle dues payable by the borrower
- Sell or lease the business of the borrower
- Undertake management takeover or change of the borrower’s business
How does an Asset Reconstruction Company work?
The banks will transfer the stressed assets to the ARC at the net book value. In return, the bank will receive 15% cash and 85% security receipts from the Asset Management Company against the amount of the bad loan.
Asset Reconstruction Company: Capital needs
According to the amendment made in the SARFAESI Act in 2016, an ARC must maintain a minimum net owned fund of Rs 2 Crore. This threshold was subsequently raised to Rs 100 Crore. Additionally, ARCs are required to uphold a capital adequacy ratio of 15% of their risk-weighted assets.
Asset Reconstruction Process followed by ARCs
The entire process of asset reconstruction is overseen by ARCs in various stages, with the primary objective of generating more profits from debts. Let’s delve into the process followed by ARCs in asset reconstruction:
- Identifying NPAs: The initial step in the asset reconstruction process involves identifying non-performing assets. ARCs scrutinise the financial statements of banks to pinpoint loans that have transitioned into NPAs.
- Acquiring NPAs: Once the NPAs are identified, ARCs acquire these distressed assets from banks at a discounted price. This enables banks to cleanse their balance sheets and concentrate on their core business operations.
- Resolving and restructuring: Following the acquisition of NPAs, ARCs focus on resolving and restructuring these assets. They assess the feasibility of the underlying business and devise a plan to revitalise it. This may entail debt restructuring, infusion of capital, or changes in management.
- Managing asset: ARCs assume responsibility for managing the acquired assets and strive to maximise their value. They may enlist professional managers or experts to enhance the operations and profitability of the distressed business.
- Recovery and disposal: ARCs aim to recover the maximum possible value from the distressed assets. They explore various avenues, such as asset sales, debt restructuring, or forging strategic partnerships. The proceeds recovered are then distributed among the stakeholders.
Asset Reconstruction Company: Eligible debts
The ARC can only assume control of secured debts that have been designated as Non-Performing Assets (NPAs). If debentures or bonds remain unpaid, the holder of the securities must issue a 90-day notice before they become eligible for acquisition. Banks and other financial institutions are mandated to categorise their debts into the following four categories:
- Standard
- Sub-standard
- Loss
- Doubtful
The criteria for categorisation into these groups vary depending on the type of financial institution and the regulatory authority overseeing it. Out of the aforementioned categories, a non-performing asset would fall under either sub-standard, doubtful, or loss asset.
Asset Reconstruction Company: Benefits
Engaging an ARC can offer numerous benefits to a bank or another lender.
- Efficient NPA resolution: ARCs possess expertise in resolving NPAs effectively and efficiently. With dedicated professionals analysing assets, identifying potential buyers, and negotiating deals, banks can recover a significant portion of their bad loans.
- Expertise in debt restructuring: Registered ARCs under RBI have a deep understanding of debt restructuring techniques. They assist banks in restructuring the debt of distressed borrowers, thereby enhancing the chances of recovery, and managing the bank’s financial health effectively.
- Access to a wider network: ARCs maintain a broad network of investors, both domestic and international, interested in distressed assets. Banks, by collaborating with an ARC, can tap into this network to find potential buyers for their NPAs, thereby increasing the likelihood of successful asset resolution.
- Reduction in legal hassles: ARCs employ legal experts proficient in handling legal issues pertaining to distressed assets. These experts navigate complex legal processes, mitigating legal challenges for banks and saving time and resources.
- Focus on core banking activities: Outsourcing NPA management to an ARC enables banks to concentrate on core banking activities. This assistance allows banks to allocate resources more efficiently, thereby enhancing overall operational efficiency.
Conclusion
Asset Reconstruction Companies play a crucial role in India’s financial sector, aiding banks, and financial institutions in managing NPAs. These specialised institutions acquire distressed assets from banks, restructure debts, and aim to maximise their value through efficient resolution strategies. The asset reconstruction process involves identifying NPAs, acquiring them at a discounted value, resolving and restructuring the assets, managing them efficiently, and eventually recovering maximum value through various strategies. ARCs offer several benefits, including efficient NPA resolution, expertise in debt restructuring, access to a wide network of investors, reduction in legal hassles, and the ability for banks to focus on core banking activities. Overall, ARCs contribute significantly to revitalise the economy and support the financial sector in India.
FAQs
What is an Asset Reconstruction Company (ARC)?
An Asset Reconstruction Company (ARC) is a specialised financial institution that purchases distressed assets from banks at a mutually agreed value with aim of recovering debts or associated securities independently.
How do ARCs operate?
ARCs operate by acquiring non-performing assets (NPAs) from banks, restructuring debts, managing acquired assets efficiently, and aiming to maximise their value through various resolution strategies, such as debt restructuring, asset sales, or partnerships.
What are the benefits of engaging an ARC?
Engaging an ARC can offer benefits, such as efficient NPA resolution, expertise in debt restructuring, access to a wider network of investors, reduction in legal hassles, and the ability for banks to focus on core banking activities.
What are the eligibility criteria for ARCs in India?
As per the SARFAESI Act amendment in 2016, ARCs in India must maintain a minimum net owned fund of Rs 2 Crore, subsequently increased to Rs 100 Crore. Additionally, they are required to uphold a capital adequacy ratio of 15% of their risk-weighted assets.
How do ARCs categorise eligible debts?
ARCs can only assume control of secured debts designated as NPAs. Debentures or bonds must remain unpaid, with the holder of the securities issuing a 90-day notice before they become eligible for acquisition. Debts are categorised by banks into standard, sub-standard, doubtful, or loss assets, depending on regulatory guidelines and the institution's criteria.
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