AGENDA

• Origin and background of ARC

•Formation of ARC
•NPA’s Management
•Approaches to Resolution
•Foreign Investment in ARC
•ARCIL and RARC
•Laws and Regulations
 ORIGIN OF ARCS
• Established under SARFAESI Act(The Securitization
• and Reconstruction of Financial Assets and
• Enforcement of Security Interest Act, ) 2002.
• Established to acquire, manage and recover
illiquid or
• ‘Non-Performing’ Assets [NPAs] from Banks / FIs.
• Recovery value with optimal costs through its
• innovative NPA resolution methods
 BACKGROUND OF ARC’S.
• Recommended by narsimham committee2 to clean up
• balance sheets.
• ARC is a company which is set up with the objective
of
• taking over distressed assets (Non performing assets)
• from banks or financial institutions .
• to reconstruct or re-pack these assets to make those
• assets saleable
 Why there is need for ARCs in
India???
• In India, level of non-performing assets with banks
• and FIs alarmingly high due to:
• Economic condition
Poor repayment environment
Government intervention in loan sanctions
Loan waivers

• 
• The Government of India has proactively taken steps
• to clean up bad loans in the banking system
 MEANING OF ARC
• Reconstruction company is a company formed
for reconstruction
 FORMATION OF ARC’S
• General guidelines are given inthe
amendment of.
• 
• SARFAESI Act which is done in 2004.
• ••Key requirements
• 1.Issuing a certificate.
• 2 . Director should have relevant professional
exp
 PROCESS OF ACQUISTION
• Can acquire the financial assets of non
performing
• asset companies on their own balance sheet.
• Issue of bonds or debentures for
acquisition
 NPA
CAUSES OF NPA FORMATION
• Poor Credit Appraisal System
• •Lack of Proper monitoring of lending
portfolio
•Lack of corporate culture
•Non – Transparent accounting policy
•Abolition ofLicense Raj
 RESULT
• Credit Information Bureau (CIB)
• •The Securitization and Reconstruction of
Financial
• Assets and Enforcement of Security Interest
• Act,2002.
• •Asset Reconstruction Companies(ARC)
 Role of ARC under SARFAESI Act,
2002
• Improve the recovery and reduce NPA
• •Acquisition of Interest
 What will ARCs do?
• Purchase the non performing assets from banks
and financial institutions at a discount as high as
75 per cent of the original value of the loan.
NPAs can be assigned by banks and FIs. In turn
these

• assets will be reconstructed /re- packed and then

sold in the market in various forms or recovered
through securitization and reconstruction of
enforcement of security
 Measures for Reconstruction specified u/s
9(a) to (f) of the Ordinance
• Proper management of business of borrower.
• •Sale or lease of a part or whole of business of
• borrower.
• •Rescheduling of payment of debts payable by
• borrower.
• •Settlement of dues payable by borrower.
•Taking possession of secured assets
 Issues that deserve attention in
establishing ARCs
• Must have operational independence and
sufficient
• authority.
• •There should be some kind of fiscal incentives.
•Cost control occupies an important place.
•There should be a mechanism to review the
working

• of ARC
 The problem of non-performing
loans
• Owners do not receive a market return on
their
• capital.
• •Lower deposit rates and higher lending
rates
•Misallocate credit from good projects
•Which may lead to economic contraction
 Approaches to Resolution:
• Bank-led approach (Creditor-led approach)
• Vs
• 
• The AMC approach
 Advantages of an ARC approach
• Centralization of bad loans in one or a few
hands
• Banks do not have to deal with problem
clients
• Easier capital-market based funding for an
ARC
 Powers of ARC
• Possession
•Management
•Reduce the procedure[Short term]
•Decision on Asset
 Functions of ARC
• Act as an agent
•Act as receiver
•Act as manager Sec 13 (4) (c)
•AS a service provider
•ARC not to undertake function of securitization
and

• no legal transfer of asset to its ownership, while

• caring out the function
 Methods for NPA
• Securitization
•Asset reconstruction company
•Exemption from registration of security
receipt
 RBI Guidelines
• Minimum owned fund of Rs.2 Crores (Sec-3)
•Capital Adequacy ratio
•Target
•No account to be maintain for asset of(Trust)
•Amount realization
•May invest amount of owned funds in the
security

• deposit issued by trust.

 Foreign Investments in Asset
Reconstruction Companies
• Government decided to permit Foreign Direct
• Investment (FDI) in equity capital.
• •Foreign Investment Promotion Board (FIPB)
to
• consider applications from persons/entities
eligible
• to invest in India in equity capital
 Conditions
• Maximum foreign equity shall not exceed 49%
of the
• paid up capital.
• •FDI alone will be permitted; investments by
FIIs will
• not be permitted
 International Scenario
• In 1980s, U.S. used government sponsored ARC - Resolution
• Trust Corporation (RTC) to overcome thrift crisis. RTC
acted as a "bad bank" and functioned as an effective sales
mechanism for disposal of assets.

• •In the early 1990s Mexico and Sweden demonstrated

• successful use of ARC mechanism.
• •Korea used KAMCO as the nodal agency for acquiring and
• disposing NPA’s.
• •In Malaysia, Danaharta is the centralized ARC set up at the
• instance of Government.
• •Japan, China, Thailand and Indonesia have all used ARC
• mechanism during the South-East Asian crisis
 List of the name of ARC’s
• Asset Reconstruction Company (India) Ltd, (ARCIL)
Assets Care Enterprise Ltd.,
ASREC (India) Ltd,
Pegasus Assets Reconstruction Pvt. Ltd.
Dhir & Dhir Asset Reconstruction & Securitization

• Company Ltd
• International Asset Reconstruction Company Pvt.
• Ltd.(IARC)
• Reliance Asset Reconstruction Company Ltd.
• Pridhvi Asset Reconstruction and Securitization
• Company Ltd.
• •Phoenix ARC Pvt Ltd.
• •Invent Assets Securitization & Reconstruction Private
• Limited
• •JM Financial Asset Reconstruction Company Limited
• •India SME Asset Reconstruction Company Limited
• (ISARC)
• •Edelweiss Asset ReconstructionCompany Limited
 ARCIL
• First Asset Reconstruction Company to commence
• business of resolution of NPAs .
• In pursuance of Section 3 of the Securitisation Act
• 2002, it holds a certificate of registration dated
August 29, 2003, issued by the Reserve Bank of
India (RBI) and operates under powers conferred
under the Securitisation Act, 2002.
• Arcil has recently launched a retail NPAs resolution
• initiative through Arcil-Arms (a division of Arcil).
• •Arcil was incorporated as a public limited company
• on February 11, 2002 and obtained its certificate of
• commencement of business on May 7, 2003.
• •Assets under management over Rs. 8000 cr
 Shareholdings of ARCIL
State Bank of India
64,816,980
19.95
IDBI Bank Ltd.
62,323,800
19.18
ICICI Bank Ltd.
43,076,000
13.26
Punjab National Bank
32,506,486
10.01
Lathe Investment Pte Ltd.1
32,164,818
9.90
Infrastructure
Development Finance
Company Ltd.
27,197,743
8.37
First Rand Bank Ltd., South
Africa13,358,662
 Business Model
Declaration of a trust for the benefit of the holders of
the Security Receipts (SR) issued by the trust.
••The sellers are typically a bank or a financial
institution operating in India as defined under the
Securitisation Act, 2002.
••NPLs are acquired by Arcil under a trust structure.
They reconstruct by adopting various measures as
prescribed under the Securitisation Act, 2002 to
realize value from the underlying assets.
••Portfolio of NPLs is prepared, the same should not be
modified during the process of sale having regard
to the substantial efforts put in by the prospective
buyers as well as the selling banks during the
process.
 Structured along the DRA model
• refer image
 KEY DEVELOPMENTS FOR ASSET
RECONSTRUCTION COMPANY (INDIA) LIMITED
• Plans to Raise INR 20,000 Million. Both
domestic
• and foreign investors will contribute to the
fund.
• ••To Acquire Stake In Southern Petrochemical
• Industries Corp. Ltd(SPIC)
 Who are benefited by RARC ?
• Lenders
• ••Investors
••Asset Buyers
••Service Providers
 Challenges of ARC
• Sourcing funding from co-investors
••Working out the acquisition price
••Finding a way to speed up recovery process
 Major factors in the successful
functioning of ARCs
• Ensuring participation of FIIs which would bring in
• new money and providing tax-exempt status would
• reduce the intermediation costs further.
• •Banks/FIs need to accelerate the sale of NPAs to
• ARCs, thereby converting their illiquid, capital-
• consuming NPAs to cash
• ARCs need to provide an early exit to the banks from
• NPAs.
• •Well functioning of ARCs differ from other
• businesses.
• •Quality of team and resources available with them.
• •Ability to work with the legal system.