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
