Asset Reconstruction Company (ARC) and its role in NPA management
Asset Reconstruction Company (ARC) is a financial institution that is in the business of buying Non-Performing Assets (NPAs) from banks and financial institutions and effecting settlement with borrower. Mounting non-performing assets has been a major challenge for the banks in India in general and public sector banks in particular. The non-performing assets in Indian banks stand at Rs 10.25 lakh crore as on 31 March 2018, amounting to around 11.8 % of total loans given by the banks.
What is an Asset Reconstruction Company (ARC)?
There were several initiatives to tackle NPAs. Creation of dedicated ARCs was a major step in this direction. An Asset Reconstruction Company or ARC is a financial institution that buys the bad assets or NPAs from banks and other lending institutions. ARCs are specialized institutions that pay focused attention on recovery. Banks and other financial institutions sell their non-performing assets to ARCs to clean up their balance sheets. By selling bad assets to asset reconstruction companies, financial institutions save themselves from the duty of chasing defaulters. Their precious time, energy and efforts can be invested in better assets.
The sale of asset is carried out at mutually agreed value. This value is arrived at based on mutual negotiation between the bank and ARC based on the realizable value of assets and other parameters and subject to the guidelines stipulated by the regulator. ARCs which buy bad loans have expert teams with adequate knowledge in legal and recovery matters to ensure better recovery or revival.
The Asset Reconstruction Companies were set up in India on the basis of legal status provided by the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002; enacted in December 2002. However, due to various reasons, performance of many asset reconstruction companies has not been in expected lines. The new Insolvency and Bankruptcy Code, 2016 (IBC) gives a critical role to the ARCs in settling the bad assets through the insolvency process. It is expected that the performance of ARCs will improve with more legal support.
Which are the major Asset Reconstruction Companies (ARCs) in India?
There are 23 asset reconstruction companies in India. Main among them are:
Asset Reconstruction Company (India) Limited (ARCIL)
Asset Care & Reconstruction Enterprise Limited (ACRE)
ASREC (India) Limited
Pegasus Assets Reconstruction Private Limited
Alchemist Asset Reconstruction Company Limited
International Asset Reconstruction Company Private Limited
Reliance Asset Reconstruction Company Limited
Pridhvi Asset Reconstruction and Securitisation Company Limited
Phoenix ARC Private Limited
Invent Assets Securitisation & Reconstruction Private Limited
JM Financial Asset Reconstruction Company Limited
India SME Asset Reconstruction Company Limited (ISARC)
Edelweiss Asset Reconstruction Company Limited
UV Asset Reconstruction Company Limited
How do ARCs meet their funding requirements through Security Receipt (SR)?
ARCs meet their funding requirements by issuing bonds and debentures. But their major source of funding is through Security Receipt (SR). It is a unique method for meeting fund requirement of ARCs. As defined in SARFAESI Act, Security Receipt is a receipt or other security, issued by an asset reconstruction company (or a securitization company) to any Qualified Institutional Buyer (QIB) for a particular scheme. The Security Receipt conveys a right, title or interest in the underlying financial asset to the holder of receipt (QIB). ARCs issue SRs backed by impaired assets for raising funds for buying non-performing assets. Security receipts should be redeemed over a period of six to eight years.
Banks shall subject the investment in security receipt (SR) to valuation at least twice in a financial year based on the NAV of SR with creation of provision by debit to P&L account for reduction in NAV, if any.
What are the norms to be followed by ARCs in purchase of NPAs?
As per the guidelines, NPAs shall be acquired by ARCs at a ‘fair price’. They should use uniform process in an objective manner for valuation of all bad assets of similar feature. Banks may receive bonds/ debentures/ Security Receipts as sale proceeds of NPAs. As per the prevailing instructions, ARCs should give at least 15% of the value of assets in cash. Similarly, the maximum maturity of Bond or debentures shall not exceed six years. The rate of interest on bonds/ debentures should be at least 1.5% above the RBI’s ‘bank rate’.
In 2017, RBI stipulated that an ARC should have minimum net owned fund of Rs. 100 Cr. The earlier requirement was Rs. 2 Cr. The revision was made to ensure sufficient own funds to effect more cash purchases.
What are the methods adopted by ARCs for revival of /recovery for bad assets?
Various measures stipulated by SARFAESI act that can be employed by ARCs for revival of the unit or recovery are mentioned below.
a) Changing the management by taking over of the business of the borrower,
b) Lease or sale of the business of the borrower
c) Restructuring or rescheduling of debt thereby providing more time to the borrower
d) Settlement of liability with borrower
e) Enforcement of security interest whereby ARCs take possession of the assets like primary security or collateral securities and selling them for realization of amount. The security may include land, building, machinery or other assets.
