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In India, level of non-performing assets with banks & FIs alarmingly highdue 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.
Securitization Asset Reconstruction Exemption from registration of security receipt .
committee II recommended formation of ARC with a view to clean the balance sheet of banks. ARC is a company which is set up with the objective of: Narasimham Taking over distressed assets (NPA) from banks or financial institutions To reconstruct or re-pack these assets to make those assets saleable .
Purchase the NPA from banks & FI at a discount as high as 75% of the original value of the loan NPAs can be assigned by Banks & Fis In turn these assets will be reconstructed/re-packed & then sold in the market in various forms or recovered through securitization & reconstruction of enforcement of security .
institution of debt recovery tribunals & Corporate Debt Restructuring (CDR) etc. . Steps taken by government of India & RBI Enactment of Securitisation & Reconstuction of Financial Assets & Enforcement of security interest act 2002 & issuing of detailed draft guidelines by RBI Stengthening of credit appraisal & monitoring system. risk based supervision.
manage problems of liquidity. asset liability mismatch & improve recovery & reduce NPLs An ARC may acquire an interest in financial assets of any bank/FI Enables SC/ARC to take possession of secured assets of borrowers & realize the same The Act also empowers the RBI to stipulate guidelines & directions to ARCs . 2002 Enables Banks & FIs to realize long term assets. Formation of SARFAESI Act.
it can mix up good assets with bad ones & make a sale which is palatable to buyers It is easier to do capital-market based funding for an ARC than for the Banks themselves . energy & funds for development of their business Bank do not have to deal with problem clients It deals with a larger portfolio.Centralisation of bad loans in one or few hands The buying of impaired assets from banks or FIs by ARCs will be able to use their time.
Ltd Dhir & Dhir asset Reconstruction & securitisation company Ltd Pridhvi Asset Reconstruction & Securitisation Company Ltd Phoenix ARC Pvt Ltd JM Financial Asset Reconstruction Company Ltd . (ARCIL) Assets Care Enterprise Ltd ASREC (India) Ltd Pegasus Assets Reconstuction Pvt.Asset Reconstruction Company (india) Ltd.
IDBI bank & UTI bank) Commenced business imediately after enactment of the Securitisation Act. 2002 ARCIL has launched retail NPAs resolution initiative throuh ARCIL-Arms (a division of ARCIL) Assets under management over Rs. First Asset Reconstruction Company to commence business of resolution of NPAs Initial equity of Rs.10 Cr with ICICI bank.5% stake each (remaining to be acquired by HDFC. IDBI & SBI to pick up 24. 8000 Cr .
2 Cr ² Sec 3 CAR of at least 15% of total final assets OR Rs.Minimum owned funds of RS.100 Cr. whichever less Reach the level of minimum owned fund within three months No account to be taken whether assets are transferred to trust Amount continued to be held by SC/ARC until realization of assets & redemption of security receipts issued against such assets May invest amount of owned fund in the security receipts issued by the trust .
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 Enforcement of security interest Settlement of dues payable by borrower Taking possession of secured assets .
Power to take over possession of secured assets (General) Taking over management of borrower·s business (Special) To cut short legal procedures & engage in whole sale purchase of banks bad loans Either sell assets or lease them & utilise the cash flow .
while carrying out functions Act merely as the agent of bank/FI & carry out functions as a service-provider Act as the Receiver of the Court. if appointed by any court or tribunal Act as a manager as in Section 13 (4) (c) ARC not to undertake function of securitization & no legal transfer of assets to its ownership. if so appointed . Act as an agent for any bank or financial institution Act as a receiver.
investments by FIIs will not be permitted Policy on FDI to be reviewed after two years & of FII investment after one year . 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 Maximum foreign equity shall not exceed 49% of the paid up capital FDI alone will be permitted.
Ensuring participation of FIIs which would bring in new money & providing tax-exempt status would reduce the intermediation costs further Banks/FIs need to accelerate the sale of NPAs to ARCs. capital consuming NPAs to cash ARCs need to provide an early exit to the banks from NPAs Well functioning of ARCs different from other businesses Quality of team & resources available with them Ability to work with the legal system . thereby converting their illiquid.
Must have operational independence & sufficient authority There should be some kind of fiscal incentives Accountability & transparency are also important Cost control occupies important place There should be a mechanism to review the working of ARC .
Debt aggregation Sourcing funding from co-investors Working out the acquisition price Finding a way to speed up recovery process .
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