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ARC Concept

"Asset Reconstruction Company"

 “Asset Reconstruction Company” (ARC) is similar to asset management company prevalent globally. Narsimham Committee – I (1991) envisaged setting up of a central Asset Reconstruction Fund. It was proposed that the same be funded by resources from Central Government. This was to facilitate Banks to improve their balance sheets by cleaning up their non-performing loans portfolio. However, the same could not get implemented for various reasons. Therefore, Narsimham Committee – II (1998) proposed asset reconstruction companies, on the similar lines of asset management companies, a process initiated in Malaysia, Korea and several other countries and was successfully implemented and operated in these countries. By keeping the original objective of asset reconstruction fund in mind and to give more emphasis on the reconstruction aspects, the term ARC has been used in India.

 Need for Asset Reconstruction Companies
To alleviate the global issues of bad loans, Asset Reconstruction Companies have been set up in various countries of the world.
Bad loans arise as part of  banking operations or due to regulatory requirements or change in environment.
There could be two possible ways to obviate the accumulation of bad loans.
(i)  Banks to manage their own bad loans by providing incentives, legislative powers, or special accounting or fiscal advantages.
(ii) Facilitate the management of bad loans by apex body through a specialised agency or agencies.

ARCs are the specialised agencies which facilitate bad loan resolution of banking system.

 Both approaches have their own pluses and minuses and there is no empirical evidence to suggest which approach is better than the other. Across the world, various entities have tried either of the two approaches. There are success as well as failure stories for the above.

Advantages of an ARC approach

  • All advantages available for any centralized process
  • ARCs being the specialized agencies have NPA resolution as the core activity
  • Banks can concentrate on normal banking operations rather than dealing with sticky assets
  • ARCs as a Central agency acquires bad loans from Banking system by bringing in investors.

Enacting The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act 2002) and subsequent amendment by the Government of India has given birth to the Asset Reconstruction Companies in India.