Syllabus: GS3/ Economy
Context
- The Reserve Bank of India (RBI) has introduced revised norms for Asset Reconstruction Companies (ARCs) to streamline the settlement of dues with borrowers.
Key Features of the Guidelines
- Framework for Settlement of Dues: ARCs must adopt a Board-approved policy to govern settlements.
- Differentiated Approach Based on Loan Size:
- For dues above ₹1 crore: Approval requires recommendations by an Independent Advisory Committee (IAC), comprising experts in technical, financial, or legal domains.
- For dues up to ₹1 crore: Settlement proposals can be approved by officials not involved in acquiring the concerned financial asset to avoid conflicts of interest.
- Recovery Safeguards: Settlements must ensure the Net Present Value (NPV) of the settlement is not less than the realisable value of securities.
Asset Reconstruction Company (ARC)
- It is a financial institution that buys the NPA or bad assets from banks and financial institutions so that the latter can clean up their balance sheets.
- The Union Budget 2021-22, announced the setting up of Asset Reconstruction Companies in India.
- ARCs play a critical role in the resolution of stressed financial assets of banks and financial institutions, thereby enhancing the overall health of the financial system.
- ARCs are regulated by the Reserve Bank of India (RBI) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
| What are Non-Performing Assets (NPAs)? – Non-Performing Assets (NPAs) are loans or advances issued by banks or financial institutions that no longer bring in money for the lender since the borrower has failed to make payments on the principal and interest of the loan for at least 90 days. National Asset Reconstruction Company Ltd (NARCL) – NARCL, a government entity, was incorporated in 2021 with majority stake held by Public Sector Banks and balance by Private banks with Canara Bank being the sponsor bank. – It is registered with the Reserve Bank of India as an Asset Reconstruction Company under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. |
Functions of ARCs
- Acquisition of Bad Loans: ARCs purchase NPAs from banks and financial institutions at a discounted price, allowing lenders to clean up their balance sheets.
- Resolution of Stressed Assets: After acquiring bad loans, ARCs use various strategies such as restructuring, one-time settlements, or asset liquidation to recover dues.
- Securitization of Loans: ARCs may issue securities or bonds to investors, backed by the underlying bad loans, to raise funds for further asset acquisitions.
Concluding remarks
- ARCs serve as a vital mechanism in India’s financial ecosystem, addressing the pressing issue of non-performing assets (NPAs) and enhancing the health of the banking sector.
- By streamlining asset recovery and resolution, ARCs not only enable banks to focus on fresh credit but also contribute to financial stability and economic growth.
Source: TH
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