Asset Reconstruction Companies (ARCs)

The Reserve Bank of India (RBI) has issued new directives for Asset Reconstruction Companies (ARCs) to enhance the management of non-performing assets (NPAs) and ensure a healthier financial system in India.

About ARC:

• ARCs are financial institutions that buys the Non Performing Assets (NPA) or bad assets from banks and financial institutions so that the latter can clean up their balance sheets.
• In the Union Budget 2021-22, Finance Minister announced the setting up of ARCs in India to take care of Non-Performing Assets (NPAs) of stressed banks.
• They are registered under the RBI and regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

RBI’s New Master Direction for ARCs:

• The Master Direction for ARCs has been issued under the authority granted by the SARFAESI Act, 2002.
• Objective: To ensure ARCs operate prudently and efficiently, protecting investor interests and maintaining financial stability.
• Minimum Net Owned Funds (NOF): ARCs must maintain a minimum NOF of Rs 300 crore to commence business in securitization or asset reconstruction.
• Registration Requirement: ARCs need to apply for and obtain a Certificate of Registration (CoR) from the RBI before starting their operations.
• Investment Restrictions: ARCs are not allowed to invest in land or buildings, except for their own use, which should not exceed 10% of their owned funds.
• Prohibition on Deposits: ARCs cannot raise funds through deposits.
• Capital Adequacy: A capital adequacy ratio of at least 15% of total risk-weighted assets must be maintained.
• Leadership Age and Tenure Limits: The maximum age for MD/CEO or Whole-time Director (WTD) is capped at 70 years, with a tenure limit of five years at a time and a maximum continuous tenure of fifteen years.
• Reporting Malpractices: ARCs must report serious professional misconduct by chartered accountants, advocates, and valuers to the Indian Banks Association (IBA) for inclusion in a fraud database.

Significance of ARCs:

• Encourage prompt resolution of stressed assets, facilitating better value realization.
• Inject liquidity into the economy by addressing distressed assets.
• Enhance bank valuation and strengthen their capacity to raise market capital.

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