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The prominent problem in the country right now is the alarming volume of Non-Performing Assets with the banking system. Several attempts were made to tackle NPAs. A serious such step was the creation of dedicated institutions called Asset Reconstruction Companies or ARCs that purchase bad assets or NPAs from banks at a negotiable price and helps banks to clean up their balance sheets.
Performance of the ARCs is under evaluation in the context of the mounting NPAs. At the same time, the new Insolvency and Bankruptcy Act will give a critical role to the ARCs in settling the bad assets through the insolvency process.
Assets reconstruction companies are recognized by RBI as NBFC whose main objective is to handle NPA of the banks. The Role of AFC is very vital in terms of re-organization of the bank debt. RBI is very stringent while giving permission to ARC.
Table of Contents
An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions and cleans up their balance sheets. In other words, ARCs are in the business of buying bad loans from banks.
ARCs clean up the balance sheets of banks when the latter sells these to the ARCs. Which helps banks to concentrate on normal banking activities. Banks rather than going after the defaulters by wasting their time and effort can sell the bad assets to the ARCs at a mutually agreed value.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up ARCs in India. Section 2 (1) of the Act explains the meaning of Asset Securitization. Similarly, ARCs are also elaborated under Section 3 of the Act.
The SARFAESI Act provide service for reconstructing bad assets without the intervention of courts. Since then, a large number of ARCs were formed and were registered with the RBI which has got the power to regulate the ARCs.
A Securitisation Company or Reconstruction Company,
Net Owned Fund of every Securitisation Company or Reconstruction Company shall not be less than Rs. 2 crore or such other higher amount as the Reserve Bank.
Any SC/RC carrying on business shall have a minimum Net Owned Fund not less than fifteen percent (15%) of the total financial assets acquired or to be acquired by the SC / RC on an aggregate basis, or Rs.100 crore, whichever is less. The minimum NOF shall be maintained on an ongoing basis.
All Securitisation Company or Reconstruction Company (SC/RC) shall maintain a capital adequacy ratio on an ongoing basis, which shall not be less than fifteen percent of its total risk-weighted assets. The risk-weighted assets shall be calculated as the weighted aggregate of on-balance sheet and off-balance sheet items as specified.
Arcil is a non-government company
It assists the banks in cleaning up their balance sheets.
Non-Performing Assets or the bad assets are bought by the ARC so that they can clean the balance sheets of banks and other financial institutions.
ARCs in RBI are Asset Reconstruction Companies.
These companies recover the money, when they are successful in it they make profits.
The Reserve Bank of India (RBI) regulates asset reconstruction companies.
Asset Reconstruction Company (India) Limited (ARCIL)
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