What is an Assets Reconstruction Company?
A specialized financial company known as an asset reconstruction company purchases non-performing assets, or bad assets, from banks and other financial institutions, enabling the latter to improve their balance sheets. Put otherwise, the business of ARCs is purchasing substandard bank loans.
Finance Minister Nirmala Sitharaman declared in the Union Budget 2021–22 that Asset Reconstruction Companies would be established in India to handle the Non-Performing Assets (NPAs) of financially troubled banks.
As suggested, banks from both the public and commercial sectors would establish ARCs in India. Furthermore, the government will not be making any equity contributions.
Asset Reconstruction Companies (ARCs) are essential to the dynamic business and finance landscape since they help resolve non-performing assets (NPAs) and revitalize distressed assets. This thorough book examines the roles, procedures, and importance of ARCs and clarifies how they support economic expansion and financial stability.
About Asset Reconstruction Companies
India’s non-performing assets were a staggering 14.4% of its total assets at the height of the Asian Financial Crisis. In this context, the Narasimham Committee (1998) suggested creating an ARC with the express purpose of buying bank and financial institution non-performing assets (NPAs).
In December 2002, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 was adopted, providing the legal foundation for the establishment of Asset Recovery Companies (ARCs) in India.
Asset reconstruction companies, or ARCs, are registered with the RBI.
It facilitates the bank’s ability to simplify its balance sheets and focus on regular banking operations.
A percentage of the bank’s debts that meet the criteria to be classified as non-performing assets are assumed by the ARCs. As a result, ARCs are in the asset reconstruction, securitization, or both business.
Only secured loans that have been designated as non-performing assets (NPAs) may be assumed over by the ARC.
What are the services provided by Asset Reconstruction Company?
- Acquisition of Distressed Assets: ARCs relieve banks and other financial institutions of the burden of maintaining distressed loans by buying NPLs from them at a reduced cost.
- Resolution Strategies: Using a range of recovery, restructuring, and turnaround techniques—such as asset monetization, debt restructuring, and strategic alliances—to increase the value of purchased assets.
- Debt Management and Recovery: Working with debtors to reach agreements, restructure conditions, or enforce security interests in order to maximize asset value and collect past due amounts.
- Asset management is the process of managing purchased assets to optimize returns for investors through proactive oversight, asset enhancement programs, and value optimization techniques.
- Advisory Services: Offering banks, financial institutions, and corporate clients professional guidance and advice on troubled asset management, debt restructuring, and turnaround tactics.
Operational Processes:
- Due Diligence and Asset Valuation: Carefully examining the legal, financial, and operational facets of distressed assets in order to determine their quality, worth, and hazards.
- Debt Restructuring and Resolution: Creating specialized plans for restructuring that are adapted to the unique requirements and situations of financially troubled borrowers with the goal of reviving viable companies and collecting past-due payments.
- Asset Monetization and Disposition: Putting strategies into place to sell, lease, or auction troubled assets in order to realize value; by doing so, you may take advantage of your industry connections and market knowledge to get the best results.
- Investor relations, capital raising, investment vehicle structuring, and investor management are all part of investor management. Investors include banks, financial institutions, asset management firms, and distressed debt investors.
Regulatory and Legal Compliance:
Regulatory oversight is the process of making sure that ARC operations are transparent, honest, and accountable by adhering to the rules and regulations set forth by regulatory bodies like the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).
Knowing the laws governing asset reconstruction and insolvency resolution, such as those pertaining to debt collection, the enforcement of security interests, and corporate insolvency resolution procedures, is important when it comes to the SARFAESI Act and IBC.
ARC operations entail operational, financial, and reputational risks that must be mitigated by establishing strong governance structures, risk management frameworks, and internal controls.
Challenges And Opportunities
- Economic Environment: The performance and profitability of ARCs can be impacted by changes in the macroeconomic environment, such as interest rates, inflation, and GDP growth. As a result, nimble risk management and strategic adaptability are required.
- Regulatory Landscape: ARCs’ operational environment and business models may be impacted by changing regulations and policy changes, necessitating ongoing compliance improvement and monitoring.
- Prospects for Asset Quality and Recovery: There are possibilities and challenges for asset recovery companies (ARCs) in the identification, assessment, and resolution of distressed assets because the quality and recovery prospects of these assets vary based on factors such collateral value, borrower creditworthiness, and industry dynamics.
- Technological Innovation: Using data analytics and technology to improve decision-making, risk assessment, and operational efficiency to generate value and boost competitiveness in the ARC industry.
As per the amendment made in the SARFAESI Act in 2016, an ARC should have a minimum net owned fund of Rs. 2 crores. This was later increased to Rs.100 crores. The ARCs also have to maintain a capital adequacy ratio of 15% of their risk-weighted assets
What is SAFAESI Act?
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, more commonly known by its shorter name SARFAESI Act, is legislation that allows banks and other financial organizations to recover bad loans effectively. The act can be utilized to tackle the problem of Non-Performing Assets (NPAs) through different procedures. Basically, the SARFAESI Act empowers financial institutions to ‘seize and desist’
Recent Changes in ARC Regulations by RBI:
- Strengthening Corporate Governance: To improve corporate governance at ARCs, RBI mandated that the head of the board and at least half of the directors in a board meeting be independent directors.
- Enhanced Transparency: To enhance transparency, ARCs are obligated to reveal their performance history in generating returns for investors in security receipts and communicate with rating agencies regarding schemes that have been floated within the last eight years.
- Investment Requirements: Instead of the prior requirement of 15% of total security receipts in all situations, ARCs must now invest in security receipts (SRs) at a minimum of either 15% of the transferors’ investment in such receipts or 2.5% of the total receipts issued, whichever is higher.
- SRs are instruments issued by ARCs to Qualified Buyers (QB) in exchange for their purchase of distressed assets from banks and Non-Banking Financial Companies (NBFCs).
Asset Reconstruction Companies are essential to the recovery of distressed assets because they promote credit flow, economic expansion, and financial stability. Through specialized experience, creative problem-solving techniques, and regulatory compliance, ARCs acquire, resolve, and manage distressed assets in a way that unlocks value and promotes the revival of businesses and the financial system. To accomplish their goal of resolving non-performing assets (NPAs) and contributing to a strong and resilient financial ecosystem, ARCs will persist in adapting, innovating, and cooperating as the financial landscape changes and new difficulties arise.
FAQs:
1- Is the asset Reconstruction company an NBFC?
Yes, an ARC that is primarily owned by the government is considered a bad bank. In accordance with section 45IA of the Reserve Bank of India Act, ARC is an NBFC that has been registered with the RBI to conduct NBFC operations.
2- Is Arc registered with the RBI?
In accordance with Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Guidelines’ provisions shall be applicable to all asset reconstruction companies (ARCs) that have registered with the Reserve Bank.
3- How does Arc earn money?
A specialist financial company called an asset reconstruction company acquires banks’ and other financial institutions’ non-performing assets (NPAs) so the latter can straighten out their balance sheets. Put otherwise, the business of ARCs is purchasing substandard bank loans.
4- How many ARCs are there in India?
In India, there are now 27 ARCs. A glide route has been prescribed to reach the minimum NOF target of ₹200 crore by March-end 2024 and ₹300 crore by March-end 2026 for ARCs that were in existence as of October 11, 2022, when the minimum NOF prescription was ₹100 crore.
5- What is the need for an arc?
Asset Reconstruction Companies Are Necessary
Banks oversee their own nonperforming loans by the provision of incentives, legislative authority, or unique accounting or financial benefits. Allow the apex body to manage problematic loans more easily by using a specialized agency or agencies.
6- What is the minimum fund for ARC?
The RBI stated that an ARC must have a minimum net owned fund (NOF) of ₹300 crore in order to start the asset reconstruction or securitization activity and to continue after that.
7- How to form an arc company?
Documents Required
- Certified copy of the company’s most recent AOA and MOA.
- A certified duplicate of the incorporation certificate.
- board decision declaring that no deposits have been accepted by the business.
- The Companies Act will not disqualify any of the directors.
8- What is the difference between a bad bank and an asset reconstruction company?
Bad banks don’t accept deposits, provide loans, or carry out other standard banking functions like commercial banks do. Asset Reconstruction Company is another term for a failed bank (ARC). This company buys bad loans from banks and other lenders so they can balance their books and start lending again.
9- What are the functions of ARC?
In accordance with the RBI, ARC is responsible for the following tasks: acquiring financial assets; managing changes or acquisitions; selling or leasing the borrower’s business; rescheduling debts; enforcing security interests; and settling the borrower’s outstanding balances.
10- Who regulates ARC?
Since then, a significant number of ARCs have been established and registered with the Reserve Bank of India (RBI), which has the authority to control them.
