Mint Explainer: What are ARCs and how have they performed?
Mint takes a closer look at ARCs and how they make money. Banks and non-bank lenders use asset reconstruction companies (ARCs) to clear their balance sheet of non-performing assets. Empowered by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, these institutions act as focussed recovery and turnaround specialists that buy bad debt and pay either in cash or a mix of cash and security receipts.
The set up is beneficial to lenders, who can spend fewer man hours on recovery and focus on fresh loans. As of 31 July 2022, there were 29 ARCs registered with the Reserve Bank of India (RBI). Lenders sell stressed loans to ARCs at a discount.
Unless the transaction is entirely in cash, the ARC issues security receipts that are redeemable as and when it recovers the specific loan. ARCs also charge bad-loan sellers a management fee of 1.5% to 2% of the value of the asset every year. That apart, they earn from the recoveries made, and upsides are shared with the selling bank or non-banking financial company (NBFC).
In November 2021 a central bank committee on ARCs said their performance has been lacklustre in terms of recovering assets and reviving businesses. It said banks and others could recover only about 14.29% of the amount owed by borrowers in stressed assets sold to ARCs from FY04 to FY13. However, the committee ascribed this performance to the sale of vintage NPAs to ARCs, the inability to aggregate debt from all lenders to the same borrower, the lack of additional funding for stressed borrowers, and the ARCs’ difficulty in raising funds on their balance sheet, among other things.
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