Introduction

Asset reconstruction is the handling of distressed assets to attempt to recover their value and clear them from the books. The problem of non performing loan/assets is a global one and has been receiving attention of banks, economist, regulators and public, alike. Internationally Asset Reconstruction Companies (ARCs) have been created to bring about a system for cleaning up Non Performing Assets (NPAs) from the books of secured lenders and bring the locked assets in circulation into the economy.

The word asset reconstruction company is a typical used in India.  Globally  the equivalent phrase used is “asset management companies”. The word “asset reconstruction” in India were used in Narsimham I report where it was  envisaged for  the setting up of a central Asset Reconstruction Fund with money contributed by the Central Government, which was to be used by banks to shore up their balance sheets to clean up their non-performing loans.   However, this never saw the light of the day and later on  Narsimham II floated the idea  asset reconstruction companies..

In last 15 years or so the a number of economies around the world have witnessed the problem of non performing assets.  A high level of NPAs in the banking system can severely affect the economy in many ways. The high level of NPAs leads to diversion of banking resources towards  resolution of this problems.  This causes an opportunity loss for more productive use of resources.  The banks tend to become risk averse in making new loans, particularly to small and medium sized companies. Thus, large scale NPAs when left unattended, cause continued economic and financial degradation of the country.  The realization of these problems has lead to greater attention to resolve the NPAs.  ARCs have been used world-wide, particularly in Asia, to resolve bad-loan problems. However, these  had a varying degree of success in different countries.   ARCs focus on  NPAs and allows the banking system  to act as “clean bank”.

ARC in India :

In India the problem of recovery from NPAs was recognized in 1997 by Government of India.  The Narasimhan Committee Report mentioned that an important aspect of the continuing reform process was to reduce the high level of NPAs as a means of banking sector reform.  It was expected that with a combination of policy and institutional development, new NPAs in future could be lower.  However, the huge backlog of existing NPAs continued to hound the banking sector.  It impinged severely on banks performance and their profitability. The Report envisaged creation of an  “Asset Recovery Fund” to take the NPAs off the lender’s books at a discount.

Accordingly, Asset Reconstruction Company (Securitization Company / Reconstruction Company) is a company registered under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002. It is regulated by Reserve Bank of India as an Non Banking Financial Company ( u/s 45I ( f ) (iii) of RBI Act, 1934).

RBI has exempted ARCs from the compliances under section 45-IA, 45-IB and 45-IC of the Reserve Bank Act, 1934. ARC functions like an AMC within the guidelines issued by RBI.

ARC has been set up to provide a focused approach to Non-Performing Loans resolution issue by:-

(a) isolating Non Performing Loans (NPLs) from the Financial System (FS),
(b) freeing the financial system to focus on their core activities and
(c) Facilitating development of market for distressed assets.

 Functions of ARC :

(i) Acquisition of financial assets (as defined u/s 2(L) of SRFAESI Act, 2002)
(ii) Change or take over of Management / Sale or Lease of Business of the Borrower
(iii) Rescheduling of Debts
(iv) Enforcement of Security Interest (as per section 13(4) of SRFAESI Act, 2002)
(v) Settlement of dues payable by the borrower

Benefits

  • Relieving banks of the burden of NPAs would allow them to focus better on managing the core business including new business opportunities.
  • The transfer should help restore depositor and investor confidence by ensuring the lender’s financial health. ARCs are meant to maximise recovery value while minimizing costs.
  • ARCs can also help build industry expertise in loan resolution, besides serving as a catalyst for important legal reforms in bankruptcy procedures and loan collection.
  • ARCs can play an important role in developing capital markets through secondary asset instruments.

How Does ARC actually Works :

ARC functions more or less like a Mutual Fund. It transfers the acquired assets to one or more trusts (set up u/s 7(1) and 7(2) of SRFAESI Act, 2002) at the price at which the financial assets were acquired from the originator (Banks/FIs).

Then, the trusts issues Security Receipts to Qualified Institutional Buyers [as defined u/s 2(u) of SRFAESI Act, 2002]. The trusteeship of such trusts shall vest with the ARC. ARC will get only management fee from the trusts. Any upside in between acquired price and realized price will be shared with the beneficiary of the trusts (Banks/FIs) and ARC. Any downside in between acquired price and realized price will be borne by the beneficiary of the trusts (Banks/FIs).

What is ARCIL?

ARCIL is the first asset reconstruction company (ARC) in the country to commence the business of resolution of non-performing loans (NPLs) acquired from Indian banks and financial institutions. It commenced business consequent to the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Securitisation Act, 2002). As the first ARC, Arcil played a pioneering role in setting standards for the industry in India. It has been spearheading the drive to recreate value out of NPLs and in doing so, it continues to play a proactive role in reenergizing the Indian industry through critical times.

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