What is an Asset Reconstruction Companies(ARCs)?An asset reconstruction company is in the business of acquiring Non-performing assets (NPAs).
The Banks and an ARC get into an agreement in which the ARC take over the NPAs from the Banks Balance Sheet at a certain amount, lower than the Book Value. After this process, the particular ARC try to recover this amount from the borrowers.
Why ARCs are in news these days?
- For tackling the problem of rising NPAs in Indian Banking System, the Union Government and NITI Aayog has recommended to set up an Asset Reconstruction Company(ARC) with funding from the government from the RBI and the the Government.
- As on June 2016, the total Gross Non-Performing Assets (NPAs) for public and private sector banks is around Rs. 6 lakh crore. And this problem can be solved through ARCs.
- The government gives an effective solution for NPAs and called for a need to set up an Asset Reconstruction Company (ARCs) owned by the Indian Government. This ARC will be known as Public Sector Asset Rehabilitation Agency (PARA, also dubbed as a Bad Bank).
How do Asset Reconstruction Companies(ARCs) work?
- First, an ARC takes over the NPA from a bank at a definite price which is less than the actual amount of the NPA.
- Then, NPA is transferred to ARC along with any security that was pledged while taking a loan. Now ARC will issue security receipts for fixed interest rate and will raise money for investing in other financial institutions.
- And in this way, Bank can recover its loan amount.
Why Public Sector Banks need the solution of NPAs through ARCS?PSBs condition is particularly bad as compared to private banks because they have to lend under various government objectives and social banking.
Criticism of Government funded ARCS
- Government participation in ARC will amount to taxpayers paying for the bad lending practices of the banks in the past.
- It will give a wrong impression in the minds of taxpayers who are not liable for these mistakes of bad lending.
- Managers at PARA may be able to exercise their discretion a little more freely. It can increase the chances of Corruption as high-profile corporates are involved.
Key Terms:Stressed Asset: When in an accounting principal and/or interest of loan remains overdue for more than 30 days.
NPA(Non-Performing Assets): A loan or advance for which the principal or interest payment remained overdue for a period of 90 days or more.
For a better understanding of NPAs concept, you can read our previous article on NPAs from the link given below.
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