Asset Reconstruction Companies have not been Able to Perform their Function of Asset Reconstruction of NPAs of Banks

Asset Reconstruction Company (ARC), purchases bad loans or Non-Performing Assets (NPAs) of Commercial Banks and Financial Institutions and provides focused approach to NPAs by isolating them from the financial system, freeing financial system to focus on their core activities; and facilitating development of market for distressed assets.  Although there are 16 ARCs that are operational, only a handful of them are active in resolution of distressed assets and have not been able to do much. They haven’t been able to bring that kind of capital, and even, wherever, they have brought the capital, almost no reconstruction has happened, although they are supposed to be asset reconstruction companies. ARCs have acquired bad loans merely with face value of Rs. 1.20 lac crore from banks, which is less than one tenth of the stressed loans in the banking system. The gross non-performing assets have touched Rs. 6 lac crore as on March 2016 and this does not include standard restructured loans which are in the books of the banks. These acquired assets have also not been resolved as the market for stressed assets has not developed.

Asset Reconstruction means acquisition by any securitisation company or reconstruction company of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance.

Asset Reconstruction Company or the Securitisation Company is a company registered under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. It is regulated by Reserve Bank of India (RBI) as a Non Banking Finance Company (NBFC) (u/s 45I (f) (iii) of RBI Act, 1934).

ARC performs the function of acquisition of financial assets, change or takeover the Management / Sale or Lease of Business of the Borrower, rescheduling of Debts, Enforcement of Security Interest, as per section 13(4) of SARFAESI Act, 2002 and settlement of dues payable by the borrower.

Banking Sector Reforms initiated in 1991, with acceptance of Narasimham Committee-I recommendations, established the uniform prudential norms of Asset Classification, Income Recognition, Provisioning and Capital Adequacy, broadly along the lines, recommended by the Basel Committee on Banking Supervision. The new prudential norms and greater transparency imparted to Bank Balance Sheets reflected that the Banking Sector was burdened with a very high percentage of Non-performing Assets. The Net NPAs (i.e. Gross NPAs minus provisions) to total advances were at 16.3% at the end of 1991-92 and this was the single largest cause of concern of the banking sector in India. It impinged severely on banks performance and their profitability. The committee’s recommendations envisaged creation of an‘Asset Recovery Fund (ARF) to take the NPAs off the lender’s books at a discount, with money contributed by the Central Government, to be used by banks to shore up their balance sheets to clean up their NPAs. However, this never saw the light of the day.

Subsequently, Financial Sector Reforms in 1998, i.e., the Narasimham Committee-II highlighted the need for ‘zero’ NPAs for all Indian Banks with International presence. Overall the committee wanted a proper system to identify and classify NPAs, NPAs to be brought down to 3% by 2002 and for an independent loan review mechanism for improved management of loan portfolios. The 1998 report accused poor credit decisions, behest-lending and cyclical economic factors among other reasons for the build-up of the NPAs of banks to unnerving high levels. The Net NPAs to total advances were at 8.2 at the end of 1997-98. The committee recommended creation of Asset Reconstruction Companies to take over bad debts of the banks, allowing them to start on a clean-slate. The committee’s recommendations let to introduction of a new legislation which was subsequently implemented as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)  Act, 2002 and came into force with effect from 21 June, 2002.

ARCIL or the Asset Reconstruction Company of India Ltd. is the first asset reconstruction company (ARC) in the country to commence the business of resolution of non-performing loans (NPLs) acquired from Indian banks and financial institutions. It commenced business consequent to the enactment of the SARFAESI Act, 2002. As the first ARC, ARCIL played a pioneering role in setting standards for the industry in India. It has been spearheading the drive to recreate value out of NPLs and in doing so; it continues to play a proactive role in reenergising the Indian industry through critical times.

RBI, with a view to provide a deeper market for stressed assets, has handed out approvals to the Delhi based Encore ARC; Ahmedabad based CFM, and the Vishakhapatnam headquartered Maximus ARC to float asset reconstruction companies. RBI is also working on a framework to enhance efficiency and transparency of price discovery in sale of stressed by banks to ARCs.