RBI amends framework for ARC

Why in news?

• RBI hikes minimum capital requirement for setting up ARCs to Rs.300 crore.

About Asset Reconstruction Companies:

• ARC or Asset Reconstruction companies are a specialized financial institution that buys the NPAs from banks and financial institutions.
• ARCs purchase bad assets or NPAs at a negotiable price and helps banks to clean up their balance sheets (by removing the NPAs).

ARC- Origin:

• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 provide the legal basis for the setting up of ARCs in India.
• Since then, large numbers of ARCs was formed and were registered with the RBI.
• The Act helps reconstruction of bad assets without the intervention of courts.

How it works?

• NPAs shall be acquired at a ‘fair price’ by the ARCs.
• They have to value the acquired bad assets in an objective manner.
• SARFAESI Act permits ARCs to acquire financial assets through an agreement with banks.
• Banks may receive bonds/debentures in exchange for NPAs transferred to the ARCs.
• A part of the value can be paid in the form of Security Receipts (SRs).

PRACTICE QUESTION:

Consider the following statements regarding “Asset Reconstruction Companies”:

1. They are based on SARFAESI act, 2002.

2. They are regulated by reserve bank of India.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer