What are the Challenges Faced by ARC in Case of NPAs
What are the Asset Reconstruction Companies (ARCs)?
An Asset Reconstruction Companies (ARCs) is a specific type of financial institution (having registered with the RBI) purchasing the NPAs or bad assets from banks so that the latter can clear such debts from their balance sheets. Thus, ARCs are in the activities of purchasing the bad loans from the banks or even financial institutions.
Thus, the balance sheet of the banks is cleaned up when they sell their NPAs to the ARCs. This will help the banks to focus on their routine banking activities and save their time of chasing the defaulters for recovery. The banks sell the bad assets (NPAs) to the Asset Reconstruction Companies (ARCs) at a mutually agreed value.
It is observed that out of 19 Public Sector Banks (excluding State Bank Group), majority i.e. 10 are under Prompt Corrective Action (PCA) by RBI due to NPAs. Further, the stressed assets of the banking system are at a significantly elevated level and they are ever increasing.
However, the ARC faces many hurdles and challenges to overcome in order to perform its best in this field.
Further, the Government of India has passed the Insolvency and Bankruptcy Code (IBC) offering various measures to overcome many such problems related to the functions of Asset Reconstruction Companies (ARCs).
The various challenges which stop ARCs scale up to a leading role in whole NPA play can be discussed as follow:
- First and foremost, the requirement of the ARC is to have sufficient availability of funds to match the huge amount of NPA market. It will be welcomed if the government establishes Asset Reconstruction Company (ARC) with an equity contribution from the government itself and the Reserve Bank of India (RBI) to strengthen its capital base. Thus ARC will have sufficient fund to deal NPA problem.
- Second, even if sufficient funds are available with ARC, the price expectation mismatch between selling bank (s) and buying ARC and agreement on an acceptable valuation of the bad assets will also create a challenge for ARC.
- It is the absence of a vibrant distressed debt market in India. It is also difficult to sell NPA assets in the market.
- It is observed that mostly the debt aggregation is carried out. Unless a majority of the debt is aggregated in one ARC, the fast and efficient resolution will be difficult to attain.
- To develop and possess requisite skill sets in managing turnaround story is also another big challenge for ARCs.
- The absence of professional expertise for a turnaround in ARC is very common. The professionals such as bankers, lawyers and chartered accountants who join ARCs usually expect some extra return such as employee stock ownership plans (ESOPs) as a major mode of compensation. But due to regulatory issues, this is not possible easily and ARC is deprived of professionals’ service of experts which may help it tremendously.
- There is the absence of a mature secondary market for security receipts issued by ARC to Qualified Institutional Buyers. This further leads the Banks to buy SRs backed by their own stressed assets. It is observed that currently, over 80% of SRs are held by seller banks themselves only.
- The Regulatory Constraints: Currently, all ARCs are subject to the regulation and scrutiny of the regulator i.e. the RBI and it is observed that some stringent regulations have hampered their growth and viability. Thus, the ARC is not being able to function with all its potentials.
It is utmost necessary for a rigorous and a realistic approach to pricing between the banks and ARCs.
Therefore, it is an urgent need for all stakeholders, including the regulator, to come together to make the entire process of NPA sale, resolution, recovery and revival fast and smooth.
The ARC has a very vital role to play in current scenario and it should be strengthened to solve the massive NPA problem prevailing in Indian banking industry.