Asset Reconstruction Company(ARC)

29.04.2024

Asset Reconstruction Company(ARC)

Why in the news?                                                                                                                                                                                                                                     

Recently Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Guidelines, 2024 has been issued by the Reserve Bank of India.

Important points:

• In order to ensure prudent and efficient functioning of ARCs and to protect the interests of investors, the Reserve Bank of India hereby issues Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Guidelines, 2024 (Directions).
• These directions have been issued in exercise of the powers conferred by Sections 3, 9, 10, 12 and 12A of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002).

About Asset Reconstruction Company Guidelines, 2024:

• As per the instructions, to start the business of securitization or asset reconstruction, an ARC is required to have a minimum net owned fund (NOF) of Rs 300 crore.
• Additionally, before starting the business of securitization or asset reconstruction, an ARC will apply for registration and obtain a Certificate of Registration (CoR) from the RBI.
• The instructions also state that no ARC shall invest in land or building, except investments for its own use up to 10% of its owned funds.
• Furthermore, ARCs are prohibited from raising funds through deposits.
• They are also mandated to maintain a minimum capital adequacy ratio of 15% of their total risk-weighted assets.

About Asset Reconstruction Companies (ARCs):

• ARCs play an important role in the resolution of stressed financial assets of banks and financial institutions, thereby improving the overall health of the financial system.
• It is a specialized financial institution that buys bad loans of a bank at a mutually agreed price and tries to recover those loans or the related securities itself.
• They are registered under RBI and regulated under the Securitization and Reconstruction of Financial Assets and Securities Interest Enforcement Act, 2002.
• They function under the supervision and control of RBI.
• According to RBI, ARC performs functions like acquisition of financial assets, change in management or acquisition or sale or lease of the business of the borrower, rescheduling of loans, enforcement of security interest and settlement of dues payable by the borrower.
• They constitute a portion of the bank's loans, which qualify as non-performing assets (NPAs).
• Therefore, ARCs are involved in the business of asset reconstruction, securitization or both.
• All rights already held by the lender (bank) in respect of the loan are transferred to the ARC.
• The funds required to purchase such loans can be raised from qualified buyers.
• Eligible buyers include financial institutions, insurance companies, banks, state financial corporations, state industrial development corporations, trustees registered under SARFAESI or ARCs and asset management companies registered under SEBI.
• Which invests on behalf of mutual funds, pension funds, FIIs etc.
• Qualified buyers are the only persons from whom an ARC can raise funds.

                                      Source:  Economic Times