• Transaction charges and Merchant discount rate: Transaction charges for consumers and MDR for retailers is

seen as the additional tax, hence they hesitate to prefer digital mode of transaction.
Further initiatives required to improve digital payments ecosystem
• Standardisation of devices and browsers: It is needed to make payments uniform across all kinds of browsers,
devices, and gateways and engage the confidence of users in digital payment systems.
• Awareness and education: Many consumers are still wary about using digital payments and technology; hence
companies need to educate their customers on the security advantages of digital payments in more traditional
manner.
• Internet and mobile phone accessibility: Currently, internet and mobile phones accessibility at rural and
remote areas is poor, hence government and stakeholders involved needs to take initiatives in improving
internet penetration.
• Incentives and rewards: More consumers will switch to digital payments if they receive higher rewards and
redeeming rewards with simplicity and faster.

3.5. ASSET RECONSTRUCTION COMPANY (ARC)

Why in news?
Union budget 2021-22 has proposed a new ARC/Bad Bank to consolidate and take over existing bad loans.
About the Proposal
• The ARC/bad bank proposed in the Budget will be set up by banks (both state-owned and private sector
banks), and there will be no equity contribution from the government.
o However, the Government may provide sovereign guarantee that could be needed to meet regulatory
requirements.
• It will have an Asset Management Company (AMC) to manage and sell bad assets.
o AMC manages funds for individuals and companies. They make well-timed investment decisions on behalf
of their clients to grow their finances and portfolio.
• It will look to resolve stressed assets of Rs 2-2.5 lakh crore that remain unresolved in around 70 large
accounts.
• The transfer of stressed assets to the ARC will happen at net book value.
• The bank will get 15% cash and 85% security receipts against bad debt that will be sold to the ARC.
• This structure will reduce the load of stressed assets on the bank balance sheet and look to resolve these bad
debts in a market-led way.
About Asset Reconstruction Company (ARC)
• An ARC or bad bank is a special type of financial institution (FI) that buys the debtors of the bank at a mutually
agreed value and attempts to recover the debts or associated securities by itself.
o A bad bank makes a profit in its operations if it manages to sell the loan at a price higher than what it
paid to acquire the loan from a commercial bank.
• Narsimham Committee – I (1991) first envisaged setting up of a central Asset Reconstruction Fund to facilitate
Banks to improve their balance sheets by cleaning up their non-performing loans portfolio.
• Asset Reconstruction Company (India) Ltd or Arcil, was first ARC set up in 2002 by four banks: SBI, ICICI Bank,
PNB and IDBI Bank.
• ARCs are incorporated as company under the Companies Act.
• They are registered with Reserve Bank of India (RBI) under SARFAESI Act, 2002.
• RBI mandates ARCs to maintain a minimum NOF (Net Owned Fund) of Rs 100 crore and a capital adequacy
ratio of 15% of its risk weighted assets.
• The Insolvency and Bankruptcy Code (IBC), 2016, allows ARCs to acquire equity through conversion of debt
into equity. However, they are not allowed to bid for equity in stressed companies directly.
• Since the enactment of SARFAESI Act, many ARCs have come into existence. However, the establishment of
new ARC was driven by the fact that existing ARCs were not able to deal with the problems of NPA as
o Exiting ARCs are thinly capitalized: Of the existing ARCs, only 3-4 are adequately capitalised, while more-
than-dozen remaining are thinly capitalized. This necessitates the need to set up a new structure to resolve
stressed assets urgently.
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