“Asset Reconstruction Companies” – Sudarshan Sen Committee Set-up

What is the News?

The Reserve Bank of India(RBI) has set up the Sudarshan Sen committee to review the working of Asset Reconstruction Companies (ARCs) Comprehensively. It will recommend suitable measures for enabling them to meet the growing requirements.

Headed by: The committee will be headed by Sudarshan Sen, the former executive director, Reserve Bank of India (RBI).

About Asset Reconstruction Company (ARC):

• Asset Reconstruction Company (ARC) is a specialized financial institution that buys the Non-Performing Assets (NPAs) from banks and financial institutions. It helps banks in cleaning up their balance sheets.
• Thus, it helps banks to concentrate on normal banking activities. Banks, Instead of going after the defaulters, can focus on selling their bad assets to the ARCs at a mutually agreed value.

Regulated by:

• Legal Basis: SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002 provides the legal basis for the setting up of ARCs in India.
• Functions under: ARCs function under the supervision and control of the Reserve Bank of India (RBI).

Read Also:-What is a Bad Bank & What is Bad Bank .

Capital Requirements for an ARC:

• As per the SARFAESI Act, ARCs should have a minimum net owned funds of Rs. 100Cr.
• The ARCs also have to maintain a capital adequacy ratio of 15% of its risk-weighted assets.
  • The amount of Risk-weighted assets helps to determine the minimum capital that a bank must hold to reduce the risk of insolvency.

What are the resolution strategies of an ARC? As per the SARFAESI Act, an ARC can:

• Restructure or reschedule the loan
• Enter into settlements,
• sell or lease the borrower’s business,
• take over or change the management, and
• Also, engage in security interest enforcement (sell, take possession, or lease the owned asset).
  • But enforcement or security interest can only be conducted when at least 75% of secured creditors and the ARC are in agreement.

What are sources of funds for ARCs?

An ARC can issue bonds, debentures, and security receipts to meet its funding requirements.

Security Receipt:

Read Also:-IDBI Bank out of “PCA framework

It is a receipt that an ARC issues to a Qualified Institutional Buyer (QIB). Whereas, QIB receives the title, right, or interest in the financial asset that ARC buys. It also means these Security receipts are backed by discounted bad debts that an ARC owns.

Whereas, ARC uses this fund to make an upfront payment to buy the discounted bad debts.

Furthermore, an ARC can only raise investments from Qualified Institutional Buyer (QIB).

How are ARCs different from the IBC?

• The Insolvency and Bankruptcy Code (IBC) aims at the resolution and reorganization of insolvent companies. Whereas, ARCs are set up for clearing up NPAs.
• ARCs primarily deal with recovery. Whereas, the IBC seeks a resolution of insolvency. Further, in the IBC Process, creditors can make insolvency resolution an economically viable process and entities can apply for insolvency, bankruptcy, or liquidation.

Source: The Hindu

Bad Banks – pros and cons