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Asset Reconstruction Companies


The Reserve Bank recently issued licences to 3 asset reconstruction companies (ARCs) Prudent ARC, CFM and Maximus ARC -to start operations. ET looks at the functioning of ARCs.
 
1. What's the role of ARCs?

ARCs buy sticky business loans from banks with the intension of reviving the companies con cerned. This may be a combination of actions such as infusion of capi tal or finding a buyer for unit that is acquired as security against the bad loan.

2. Shouldn't banks resolve bad loans instead of selling them to ARCs?


Banks are always in a better posi tion to deal with their borrowers, since they have had banking relations with them for long, but at the same time, recovery of dud loans can be time consuming. Unlike banks, resolution of bad debt is the core business for an ARC and, therefore, selling bad loans to ARCs will enable banks to focus on the core business of lending and mobilising resources. Secondly , the RBI has given banks incentives by allowing them to amortise any loss on sale of bad loans across

3. How have ARCs performed so far?

Considering the large number of ARCs operating in India, and the huge pile of bad loans, the performance of this segment has been poor. There are close to 16 ARCs, but only a handful are active. According to industry estimates, ARCs have acquired about `1.2 lakh crore of bad loans as against NPAs of close to `6.3 lakh crore. According to RBI deputy governor SS Mundra: " ARCs haven't been able to bring that kind of capital, and even where they have brought capital, they are supposed to be asset reconstruction companies."

4. Why are banks not selling loans to ARCs?

One reason is difference in val uation of bad loans between banks and ARCs. Banks say ARCs should pay more while ARCs say that since 15% is paid in cash, banks should accept a lower valuation.Secondly , bankers say another disincentive is the 1.5% management fee lenders have to pay every year even if there is no progress on resolution.

5. What are the challenges faced by ARCs in resolving stressed loans?

Debt aggregation is the biggest challenge faced by ARCs, since all banks do not sell bad loans at the same time. ARCs can initiate recovery action only after they have acquire 60% of the loan.It is estimated that on average, ARCs take over one year to aggregate loans.

6. How does transaction between the bank and ARCs take place?

In most cases, banks auction bad loans and ARCs are called to bid.

ARCs could either pay cash or issue redeemable bonds against the loan.The RBI has mandated that ARCs should pay at least 15% of the sale value in form of cash while the balance can be in form of security receipts or SRs.





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