Asset reconstruction companies

What is it?

• ARC or Asset Reconstruction companies is a specialized financial institution that buys the NPAs from banks and financial institutions.
• ARCs purchase bad assets or NPAs at a negotiable price and helps banks to clean up their balance sheets (by removing the NPAs).

ARC- Origin

• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 provides the legal basis for the setting up of ARCs in India.
• Since then, large number of ARCs were formed and were registered with the RBI.
• The Act helps reconstruction of bad assets without the intervention of courts.

How it works?

• NPAs shall be acquired at a ‘fair price’ by the ARCs.
• They have to value the acquired bad assets in an objective manner.
• SARFAESI Act permits ARCs to acquire financial assets through an agreement with banks.
• Banks may receive bonds/debentures in exchange for NPAs transferred to the ARCs.
• A part of the value can be paid in the form of Security Receipts (SRs).

Prelims Question

Consider the following statements regarding “Asset reconstruction companies”:
1.They are based on SARFAESI act, 2002.
2.They are regulated by reserve bank of India.
Which of the statements given above is/are correct?
(a)1 only
(b)2 only
(c)Both 1 and 2
(d)Neither 1 nor 2

Answer to the Prelims Question