The Reserve Bank of India (RBI) has recently released a report on Asset Reconstruction Companies (ARCs), observing an inconsistent growth trajectory in this sector. The report also noted a lack of alignment between the trends in Non-Performing Assets (NPAs) held by banks and Non-Banking Financial Companies (NBFCs), and the ARC industry growth pattern. Despite this, the RBI has voiced its approval for the proposed establishment of a new ARC to bolster the asset resolution mechanism.
The Role and Mechanism of Asset Reconstruction Companies
ARCs are specialised financial institutions that purchase Non-Performing Assets (NPAs) from banks and financial institutions to streamline their balance sheets. A NPA is classified as any loan or advance where the principal or interest payment remains overdue for a period of 90 days. This process allows banks to focus on regular banking activities while ARCs handle the bad assets.
ARCs in India are legally established under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
A Brief History and the Current Status of the ARC Industry
The first ARC in India, Asset Reconstruction Company India Ltd (ARCIL), was formed in 2003. Over the years, several other ARCs were registered with the RBI. There was a significant surge in the number of ARCs in 2008 and again in 2016.
However, there is a marked concentration of Assets Under Management (AUM) and the issuance of Security Receipts (SRs) within a few ARCs.
Decline in ‘Assets Under Management’
The growth trend in ARCs’ AUM has been largely unsteady, with a notable surge in FY14. However, since then, there has been a decreasing trend in comparison to the volume of NPAs held by banks and NBFCs.
Challenges Faced by Indian ARCs
Unlike public sector AMCs in other countries that enjoy access to government funding, Indian ARCs are private sector entities registered with the Reserve Bank. This often results in capital constraints which is a major concern for the ARC industry in India.
Introduction of a New ARC
In response to the Covid-19 pandemic’s effects on the asset quality of banks and NBFCs, there is a proposal to establish a new ARC. This new entity, which will be backed by both state-owned and private sector banks, aims to manage and resolve stressed assets of approximately Rs. 2-2.5 lakh crore.
Setting Up of a Committee on ARCs
The RBI has also announced the formation of a committee, chaired by Sudarshan Sen, to conduct a comprehensive review of the working of ARCs within the financial sector ecosystem.
