RBI Report on Asset Reconstruction Companies

• 29 Apr 2021

Why in News

The Reserve Bank of India (RBI) in its report on Asset Reconstruction Companies (ARCs) said that 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).

• However, the RBI has supported the government’s proposal for a new ARC, saying that “such an entity will strengthen the asset resolution mechanism further.”

Key Points

• About the 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.
    
    • A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • 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.
  • The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up of ARCs in India.
    
    • The Act helps reconstruction of bad assets without the intervention of courts. Since then, a large number of ARCs were formed and were registered with the RBI.
  • RBI has got the power to regulate the ARCs.
• Growth of the ARC Industry:
  
  • Number of ARCs: 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.
  • Concentration of Business among Few ARCs: There has been a concentration in the industry in terms of Assets Under Management (AUM) and the Security Receipts (SRs) issued.
    
    • Security Receipts (SR) are issued by the ARCs when NPAs of commercial banks and/or financial institutions are acquired by the ARCs for the purpose of recovery.
    • AUMs can be measured with the help of SRs outstanding.
  • Decline in ‘Assets Under Management’: The growth in ARCs’ AUM has been largely trendless except for a major spurt in FY14.
    
    • The AUM of ARCs has been on a declining trend when compared with the volume of NPAs of banks and NBFCs, except during the period of high growth in the AUM around 2013-14.
    • During 2019-20, asset sales by banks to ARCs declined, which could probably be due to banks opting for other resolution channels such as Insolvency and Bankruptcy Code (IBC) and SARFAESI.
• Issues with Indian ARCs:
  
  • Indian ARCs have been private sector entities registered with the Reserve Bank. Public sector AMCs in other countries have often enjoyed easy access to government funding or government-backed.
    
    • The capital constraints have often been highlighted as an area of concern for ARCs in India.
  • Despite the regulatory push to broaden, and thereby enhance, the capital base of these companies, they have remained reliant primarily on domestic sources of capital, particularly banks.
  • Banks supply NPAs to the ARCs, hold shareholding in these entities and also lend to them, which makes it necessary to monitor if there is a "circuitous movement of funds between banks and these institutions".
• About the New ARC:
  
  • The movement in asset quality of banks and NBFCs following the Covid-19 pandemic could bring ARCs into greater focus and action.
  • 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 ARC, which will have an Asset Management Company (AMC) to manage and sell bad assets, will look to resolve stressed assets of Rs. 2-2.5 lakh crore that remain unresolved in around 70 large accounts.
  • 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.
• Committee on ARCs:
  
  • The RBI has announced the setting up of a committee, under the chairmanship of Sudarshan Sen, to undertake a comprehensive review of the working of ARCs in the financial sector ecosystem.

Source: IE