The Indian banking sector is recently facing trouble with problem of Non- performing assets. There are various ways tried to solve the problem. One of them and most reliable is asset reconstruction companies. This institution buys the banks’ bad assets or NPA’s at a negotiable price and help banks to sort their balance sheet. Performance of ARC’s is under check with the NPA’s, and after the insolvency act comes into picture, it will give critical role to the ARC’s. ARC’s are recognized by the RBI and play a major role in banking sector. Though RBI has a very strict policy with giving permission to ARC, it is vital for re-organization of bank debts.
ARC can be defined as those institutions which take up the activity of clearing bad debts from the bank and other financial institutions and thereby helping banks. They carry bad loans and liabilities of the banks which are termed as NPA. For banks instead of focusing on getting money back from the defaulter, these ARC buy the debts on mutually agreed value.
SARFAESI ACT- 2002, Origin of ARC
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up ARCs in India. There is no intervention of court in respect of ARC, and these ARC’s are directly registered with RBI and RBI has got power to regulate the functioning of these ARC’s.
Role of ARC
- Acquisition of financial assets
- Change or takeover of management; sale or lease of business of the borrower
- Rescheduling of debts
- Enforcement of security interest
- Settlement of dues payable by the borrower.
Registration of ARC’s
- Every securitization company or reconstruction company needs to apply for registration under specific application form.
- The company will obtain certificate from bank under section 3 of the act.
- Such a company can take both activities of securitization or reconstruction of assets after getting the certificate.
- The company can commence business within 6 months of the issue of the certificate of registration.
- NBFC registered as SC / RC registered with the Bank under Section 3 of the SARFAESI Act, 2002 are exempted from the provisions of section 45 -IA, 45-IB, and 45-IC of RBI Act, 1934.
Permissible business activities for asset reconstruction companies
- Shall commence and undertake only securitization and asset reconstruction companies.
- Shall not raise money by way of deposit.
- If the company carries business other than allowed activities it would result in cancellation of the registration of the company.
What is the limit of net owned fund requirement?
Net owned fund of the company should not be less than Rs. 2 crore or as any higher amount specified by the RBI.
Any secularization or reconstruction company shall have to keep minimum of 15% of total financial asset acquired by the company on aggregate basis of Rs. 100 crore, whichever is less. The minimum NOF shall be maintained on regular basis.
Capital adequacy requirement
All the asset reconstruction companies need to maintain a capital adequacy ratio on an ongoing basis which should be 15% of total risk weighted assets. The risk weighted assets are calculated as weighted aggregate of on balance sheet an off the balance sheet.
How securitization companies and reconstruction companies deploy the funds?
- SC/RC for purpose of joint venture can invest in equity share capital of an SC/RC formed for purpose of asset reconstruction
- SC/ RC may deploy the excess funds only in government securities and deposits with SIDBI, National bank for agriculture, scheduled commercial banks and rural development or as mentioned by bank time to time.
- No SC/RC shall invest in land apart from its own land and that to uptill 10% of the funds only.
- Every SC/ RC has to submit a quarterly statement, within 15 days of closure of the the quarter.
- They are required to submit a copy of balance sheet to the bank along with auditors/ directors report within one month from date of AGM in which the audited documents are adopted.
- Operation of these activities of these companies are audited on a regular basis.