Prajna Capital - An Investment Guide

ASSET reconstruction was evolved as an answer to the distressed debt management problem faced by banks and financial institutions in this country. So, has the experiment succeeded? Going by the improvement in non-performing assets (the all banks’ gross NPA ratio declined to 2.3% in 2008 from 4.6% in 2002) and the number of players it has attracted, the experiment has certainly succeeded. But what needs to be emphasised is that no other country in the world operates an ARC (asset reconstruction companies) model like we do. Internationally, ARCs were set up as centralised government agencies for tackling the bad-debt problem in a banking crisis. Funded by the government, ARCs generally enjoyed special powers to cut short legal procedures and engaged in wholesale purchase of banks’ bad loans. By contrast, Indian ARCs are private sector entities that operate under a tightly-controlled regulatory regime and enjoy no special powers. They acquire NPAs through a transparent bidding pr...