Use of ‘Asset Reconstruction Companies’ (ARCs) to avoid NPAs

Use of ‘Asset Reconstruction Companies’ (ARCs) to avoid NPAs

According to the Parliamentary Standing Committee on Finance (PSC) banks are using Asset Reconstruction Companies (ARCs) to avoid Non-Performing Assets (NPAs).

  • The Standing Parliamentary Committee (PSC) observed that banks are resorting to ARCS to hedge their non-performing assets (NPAs) to avoid revealing the actual extent of bad loans. The PSC also directed that such a trend should not be encouraged.
  • The PSC has also urged the government to speed up the setting up of ARCs and asset management companies announced in the budget for the financial year 2021-22.
  • It has also been suggested to expedite the establishment of Public Credit Registry (PCR).
  • PCR is a comprehensive database of credit information of borrowers. This database is accessible to all entities making credit and credit decisions.
  • ARC is a special type of financial institution. It purchases the liabilities of the bank at a mutually agreed price and attempts to recover the debt or related securities itself.
  • The establishment of a Central Asset Reconstruction Fund was envisaged by the Narasimham Committee (Year-1991).
  • Subsequently, the proposal for ARCS was submitted by the Narasimham Committee-II (1998). MARCs are entities registered with the Reserve Bank of India under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act: SARFAESI, The Reserve Bank of India regulates ARCs like non-banking financial companies (NBFCs).

Benefits of ARCs

  • Consolidation of bad debts of banks under a single exclusive entity, and assists in their resolution.
  • This does not affect the regular banking relationship, as the balance sheets of banks remain balanced.
  • It helps in boosting the confidence of the entrepreneurs.

Source – The Hindu

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