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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 .
Issuing a certificate. SARFAESI Act which is done in 2004. Director should have relevant professional exp .FORMATION OF ARC S General guidelines are given inthe amendment of. 2 . Key requirements 1.
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 .
2002. Asset Reconstruction Companies(ARC) .RESULT Credit Information Bureau (CIB) The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
Role of ARC under SARFAESI Act. 2002 Improve the recovery and reduce NPA Acquisition of Interest .
In turn these assets will be reconstructed /re. NPAs can be assigned by banks and FIs.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.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. Taking possession of secured assets . Sale or lease of a part or whole of business of borrower. Settlement of dues payable by borrower. Rescheduling of payment of debts payable by borrower.
Issues that deserve attention in establishing ARCs Must have operational independence and sufficient authority. Cost control occupies an important place. There should be some kind of fiscal incentives. 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 Investment Promotion Board (FIPB) to consider applications from persons/entities eligible to invest in India in equity capital .Foreign Investments in Asset Reconstruction Companies Government decided to permit Foreign Direct Investment (FDI) in equity capital.
investments by FIIs will not be permitted . FDI alone will be permitted.Conditions Maximum foreign equity shall not exceed 49% of the paid up capital.
Resolution Trust Corporation (RTC) to overcome thrift crisis. used government sponsored ARC .International Scenario In 1980s. In the early 1990s Mexico and Sweden demonstrated successful use of ARC mechanism. U. China. Danaharta is the centralized ARC set up at the instance of Government. Thailand and Indonesia have all used ARC mechanism during the South-East Asian crisis . In Malaysia.S. Korea used KAMCO as the nodal agency for acquiring and disposing NPA s. Japan. RTC acted as a "bad bank" and functioned as an effective sales mechanism for disposal of assets.
(ARCIL) Assets Care Enterprise Ltd. Phoenix ARC Pvt Ltd.(IARC) Reliance Asset Reconstruction Company Ltd. Dhir & Dhir Asset Reconstruction & Securitization Company Ltd International Asset Reconstruction Company Pvt. ASREC (India) Ltd. Pridhvi Asset Reconstruction and Securitization Company Ltd. Ltd. Invent Assets Securitization & Reconstruction Private Limited JM Financial Asset Reconstruction Company Limited India SME Asset Reconstruction Company Limited (ISARC) Edelweiss Asset ReconstructionCompany Limited . Pegasus Assets Reconstruction Pvt.List of the name of ARC s Asset Reconstruction Company (India) Ltd. Ltd..
2003. Assets under management over Rs. Arcil has recently launched a retail NPAs resolution initiative through Arcil-Arms (a division of Arcil). it holds a certificate of registration dated August 29. Arcil was incorporated as a public limited company on February 11. issued by the Reserve Bank of India (RBI) and operates under powers conferred under the Securitisation Act.ARCIL First Asset Reconstruction Company to commence business of resolution of NPAs . 2002 and obtained its certificate of commencement of business on May 7. 2003. 8000 cr . In pursuance of Section 3 of the Securitisation Act 2002. 2002.
95 IDBI Bank Ltd.743 8.Shareholdings of ARCIL State Bank of India 64.164.506.01 Lathe Investment Pte Ltd.816.18 ICICI Bank Ltd. 62.90 Infrastructure Development Finance Company Ltd.076.818 9.26 Punjab National Bank 32.1 32. 27.37 .980 19.323.000 13.486 10. 43.800 19.197.
The sellers are typically a bank or a financial institution operating in India as defined under the Securitisation Act. Portfolio of NPLs is prepared. 2002. .Business Model Declaration of a trust for the benefit of the holders of the Security Receipts (SR) issued by the trust. 2002 to realize value from the underlying assets. NPLs are acquired by Arcil under a trust structure. They reconstruct by adopting various measures as prescribed under the Securitisation Act. 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 .
000 Million. Ltd(SPIC) .KEY DEVELOPMENTS FOR ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED Plans to Raise INR 20. Both domestic and foreign investors will contribute to the fund. To Acquire Stake In Southern Petrochemical Industries Corp.
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 .
Ability to work with the legal system. thereby converting their illiquid. Well functioning of ARCs differ from other businesses. Quality of team and resources available with them. . capitalconsuming NPAs to cash ARCs need to provide an early exit to the banks from NPAs. Banks/FIs need to accelerate the sale of NPAs to ARCs.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.