RBI sets up committee to review working of ARCs

Relevance of news for exam-

UPSC CSE -Preliminary Examination, Topic- Money and Banking
UPSC CSE -Mains Examination, GS Paper-Indian Economy, Topic- Money and Banking, Contemporary issues.
Sub-topic- NPA Issue

The Reserve Bank of India (RBI) has constituted a six-member panel to carry out a comprehensive review of the working of Asset Reconstruction Companies (ARCs) in the financial sector ecosystem.

Understand Meaning and concept--

·        What is ARC ?

                    i.            An asset reconstruction company is a special type of financial institution that buys the hat buys the Non Performing Assets (NPAs) from banks and financial institutions at a mutually agreed value and attempts to recover the debts or associated securities by itself.

                  ii.            An Asset Reconstruction Company (ARC) is a company incorporated under the Companies Act and registered with Reserve Bank of India under section 3 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

·        Benefits of ARC

        i.            This helps banks to concentrate in normal banking activities.

      ii.            Banks rather than going after the defaulters by wasting their time and effort, can sell the bad assets to the ARCs at a mutually agreed value.

About Committee: -

       i.            No. of Members -06

     ii.            Headed by – Sudarshan Sen (Former Executive director, RBI)

   iii.            Submit report- In 3 Months from date of its first meeting

Objective of setting up

·        Suggest ways for improving liquidity in and trading of security receipts.

·        Recommend suitable measures for enabling ARCs to meet the growing requirements of the financial sector.

·        Recommend measures to improve the efficacy of ARCs.

Meaning of Efficacy

Efficacy is getting things done. It is the ability to produce a desired amount of the desired effect, or success in achieving a given goal.

Efficiency is doing things in the most economical way.

·        Review existing legal and regulatory framework applicable to ARCs

·        Study role of ARCs in the resolution of stressed assets including under Insolvency & Bankruptcy Code (IBC), 2016.

Stressed assets = NPAs + Restructured loans + Written off assets

Note:-

In the Budget 2021-22, Asset Reconstruction Company (ARC) have been proposed to be set up by state-owned and private sector banks, and there will be no equity contribution from the government.

ü Bad loans of Indian lenders have increased in several years. The gross bad loans in the banks could increase to 13.5% by September 2021 (in the worst-case scenario, 14.8% – highest in two decades)

ü Thus, ARCs can control this increase by setting up an Asset Management Company (AMC) which would manage and sell bad assets

ü The bad bank would be transferring the NPAs to an entity (Asset Management or Asset Reconstruction Company) 

ü They would basically take over the bad loans in Public Sector Banks and manage the recoveries

Question for Practice-

1.   Discuss the need of Asset Reconstruction company in India? Also, explain what purpose does ARC fulfils? (150 Words,10 Marks)

Another Relevant topic related to this-

1.    SARFAESI Act, 2002 

What is the SARFAESI Act?

The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 allows banks and other financial institutions to seize and sell residential or commercial properties of the defaulters to recover loans.

In simple words, banks utilize this act to recover loans from non-performing assets (NPA).

It must be noted that this Act doesn't apply to unsecured loans below INR 1 Lakh or in the cases where the debt is below than 20% of the loan given.

Banks can seize and sell the collateral properties of the defaulters within 60 days of demanding repayment without the permission of the court. 

In Budget 2021-22

To improve credit discipline while continuing to protect the interest of small borrowers, for NBFCs with a minimum asset size of ₹100 crore, the minimum loan size eligible for debt recovery under the Sarfaesi Act is proposed to be reduced from the existing level of ₹50 lakh to ₹20 lakh".

Context-

Due to covid-19 pandemic, loan defaults have been rising.

NBFCs wanted the limits to be lowered so that they can take quick action against defaulters

Implications

·       Proceedings under the Act help lenders recover their dues faster.

·       If a lender cannot resort to the Sarfaesi Act, it needs to file cases in civil courts, which is a time-consuming process.

·       Recovery under Sarfaesi is applicable only to secured loans, and

·       Allows lenders to auction the property mortgaged with them to recover dues from borrowers who have defaulted on loans.

·       It is applicable to home loans, loan against property, and loan against collateral that micro small medium enterprises (MSME) avail.

·       Under the Sarfaesi Act, a lender can take possession of the property or mortgaged assets after a 60-day notice.

·       Lenders can take over the physical possession or control the mortgaged asset and can sell or transfer them to a buyer without the intervention of any court or a third party.

·       Once the property is auctioned, the lender deducts its dues and pays the rest of the funds, if any, to the property owner.

Recent Ruling:

• The SC held that all such cooperative banks involved in the activities related to banking are covered within the meaning of ‘banking company’.

• The cooperative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to banking,” the five-judge bench said.

• In the past, there have been calls to notify non-scheduled urban cooperative banks as ‘financial institutions’ so they could make use of the Insolvency and Bankruptcy Code, 2016 (IBC) to recover money.

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