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Asset Reconstruction in India
Asset Reconstruction in India
The leading problem in the country right now is alarming volume of Non-
Performing Assets with the banking system. Several attempts were made to
tackle NPAs. A serious such step was the creation of dedicated institutions
called Asset Reconstruction Companies or ARCs that purchases bad assets or
NPAs from banks at a negotiable price and helps banks to clean up their balance
sheets (by removing the NPAs). Performance of the ARCs are under evaluation
in the context of the mounting NPAs. At the same time, the new Insolvency and
Bankruptcy Act will give a critical role to the ARCs in settling the bad assets
through the insolvency process.
ARCs clean up the balance sheets of banks when the latter sells these to the
ARCs. This helps banks to concentrate in normal banking activities. Banks
rather than going after the defaulters by wasting their time and effort, can sell
the bad assets to the ARCs at a mutually agreed value.
As per amendment made on the SARFAESI Act in 2016, an ARC should have a
minimum net owned fund of Rs 2 crore. The RBI plans to raise this amount to
Rs 100 crore by end March 2019. Similarly, the ARCs have to maintain a
capital adequacy ratio of 15% of its risk weighted assets.
Regarding funds, an ARC may issue bonds and debentures for meeting its
funding requirements. But the chief and perhaps the unique source of funds for
the ARCs is the issue of Security Receipts. As per the SARFAESI Act, Security
Receipts is a receipt or other security, issued by a reconstruction company (or a
securitization company in that case) to any Qualified Institutional Buyers
(QIBs) for a particular scheme. The Security Receipt gives the holder (QIB) a
right, title or interest in the financial asset that is bought by the ARC. These SRs
issued by ARCs are backed by impaired assets.
How will the ARC carry out the process of asset reconstruction?
The main intention of acquiring debts / NPAs is to ultimately realise the debts
owed by them. However the process is not a simple one. The ARCs have the
following options in this regard:
Regarding funds,
1. An ARC may issue bonds and debentures for meeting its funding
requirements.
Bond or debentures can have a maximum maturity of six years and should have
a rate of interest at least 1.5% above the RBI’s ‘bank rate’. While dealing with
bad assets, ARCs should follow CAR regulations.
News Related to ARCs
In the first quarter of this year, banks off-loaded Rs 30,000 crore of outstanding
loans that are classified as stressed loans. Banks have sold nearly four bad
accounts to asset reconstruction companies (ARCs) as a consortium, a move
that is aimed at fetching them a better value and quicker resolution.
State Bank of India, the lead bank for Hotel Leelaventure and Bharati Shipyard,
was the driving force behind the decision to sell loans to a single ARC and all
lenders agreed to sell the loans at the price accepted by SBI, banking executives
familiar with the matter said.
New York-based $10-billion distressed fund manager Avenue Capita has picked
up a 27 per cent in Asset Reconstruction Co of India (Arcil), India’s oldest
stressed asset aggregator, a sign foreign investors have a buoyant outlook for
the sector.
Avenue Capital’s stake purchase from six shareholders gives Arcil a much-
needed shot of liquidity as it scouts for distressed assets in a market rebooted by
the new Insolvency and Bankruptcy Code (IBC).
Lathe Investment, an arm of the government of Singapore, IDFC Bank, First
Rand Bank, Karur Vysya Bank, and Quiveo Enterprises, a subsidiary of UK-
based Ashmore Group, have all exited Arcil.
“Avenue has been investing in distressed assets in India since 2005 and they can
now help us raise funds. We plan to raise Rs 1,500 crore in the next six months
and Ashmore can help us raise funds. The new bankruptcy framework has
helped quicken the resolution process and increased opportunities in the
distressed space,” said Arcil CEO, Vinayak Bahuguna.
4. Reliance ARC to double total AUM to Rs.4000 cr in three years.
The Reserve Bank of India (RBI) on Friday prohibited (ARCs) from buying
assets on a bilateral basis from its own group or parent bank.
The central bank said ARCs could not buy financial assets from a bank or
financial institution which was the sponsor, or “ a lender or a subscriber to the
fund, if any, raised by the ARC for its operations”
RBI stops asset reconstruction companies from buying assets from sponsor
banks or financial institutions via bilateral deals. An ARC shall not acquire
assets in a bilateral deal from a bank or financial institution, which is either a
lender to the ARC or a subscriber to the fund, if any, raised by the ARC for its
operationsAccording to the new rules, ARCs cannot acquire financial assets
from a bank or financial institution, which is the sponsor of the ARC, on a
bilateral basis. RBI also stopped ARCs to buy financial assets from a bank or
financial institution, which is either a lender to the ARC or a subscriber to the
fund raised by the ARC for its operations and an entity in the group to which the
ARC belongs.