News Highlight
The Reserve Bank raised the minimum capital requirement for setting up an Asset Reconstruction Company (ARC) to Rs 300 crore from the existing Rs 100 crore.
Key Takeaway
- The change aims to strengthen the securitisation sector, which plays a vital role in managing distressed financial assets.
Asset Reconstruction Company (ARC)
- About
- It is a specialised financial institution that buys Non Performing Assets (NPAs) or bad assets from banks and financial institutions so that the latter can clean up their balance sheets.
- Legal Basis:
- The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, provides the legal basis for the setting up of ARCs.
- Registration:
- ARC is a company registered under the Companies Act and registered with the Reserve Bank of India under section 3 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
- Capital Needs for ARCs:
- As per amendment made in the SARFAESI Act in 2016, an ARC should have a minimum net owned fund of Rs. 2 crores.
- The RBI raised this amount to Rs. 100 crores in 2017.
- Now it has raised to Rs 300 crore from the existing Rs 100 crore.
- Functions:
- Acquisition of financial assets
- Change or takeover of Management / Sale or Lease of Business of the Borrower
- Rescheduling of Debts
- Enforcement of Security Interest
- Settlement of dues payable by the borrower
- Supervision:
- ARCs function under the supervision and control of the Reserve Bank of India (RBI).
National Asset Reconstruction Company Ltd. (NARCL)
- Origin:
- Following up on the Union Budget 2021 announcement, the government has incorporated “National Asset Reconstruction Company Limited” (NARCL) under the Companies Act.
- Purpose:
- It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.
The SARFAESI Act
- What?
- The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, is legislation that allows banks and other financial organisations to recover bad loans effectively.
- Objectives:
- The act can be utilised to tackle the problem of Non-Performing Assets (NPAs) through different procedures.
- Purpose:
- Basically, the SARFAESI Act empowers financial institutions to ‘cease and desist.
- The Act also provides for establishing Asset Reconstruction Companies (ARCs) to acquire assets from banks and other financial institutions.
Non-Performing Assets
- A Non-Performing Asset (NPA) is a loan or advance for which the principal or interest payment is overdue for 90 days.
- Banks are required to classify NPAs further into the following categories:
- Substandard assets:
- Assets which have remained NPA for a period less than or equal to 12 months.
- Doubtful assets:
- An asset will be classified as doubtful if it has remained in the substandard category for 12 months.
- Loss assets:
- A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection.
Content Source: Business standard