Reconstruction Companies Example for Free

An effort to introduce changes in the financial sector in India was initiated way back in the 1970s. But it was only in 1991 after the report of the Narsimhan Committee on the Financial System was tabled, that the Government and the Reserve Bank of India introduced measures to develop a strong and efficient financial system. After the report by this Committee, even though regulations and norms in the financial sector were strengthened there was still an increase in the level of non-performing assets (NPAs) for banks and financial institutions.

There were certain impediments faced by the banking and financial institutions which needed to be rectified, such as the high level of Non Performing Assets (NPAs). Areas such as securitisation and reconstruction lacked proper laws. A large proportion of NPAs would cause economic and financial degradation in the country. The SARFAESI Act was enacted in 2002 and it made provisions for the setting up of Asset Reconstruction Companies (ARCs) to address the problem of NPAs. This paper looks into the various aspects of the ARC’s and tries to weigh its pros against its cons.

Non-Performing ASSETS: The Problem

In India, any person desirous of doing business has been provided with a very ‘borrower-friendly’ environment as far as financial assistance for such businesses is concerned.

While industry and trade have taken full advantage of such a conducive environment, they have not discharged their obligations. This has resulted in an alarming level on non-performing loans in the financial system.

Every process or activity generates by-products during the process intended for certain core product or service. AA by-productA is thus a secondary or incidentalA product to the core process. Non Performing Loans (‘NPLs’), also known as Non Performing Assets (‘NPAs’), are a natural by-product of the business of lending. Of course the efficiency of the overall intended process is inversely proportional to the quantum of the by-product, as a certain quantity of resources is consumed and embedded in such by-products. Banks and other financial institutions, being no different, also contract credit risks and generate NPAs.

Not only do the NPAs deprive the bank of their income on account of its exposure, but also calls on for further investment in resources – financial, managerial, etc. The adverse impact to the bank’s profitability is further compounded on account of the provisioning requirements of the capital blocked in the NPLs

. Non-performing Assets pose a risk for the following reasons: NPA’s not only create problems for the banking sector’s balance sheet on the asset side, but also create a negative impact on the income statement as a result of provisioning for loan losses. If banks become sanguine to the problem of loans going bad, they eventually encourage graft, slackness in credit underwriting and a complete lack of discipline. There is a drain on the system which affects the public at large.

This happens either in terms of the banks being funded out of taxes or their resultant failure which further results in loss of savings for the people. The urgency of the resolution of the problem of NPAs is clear. Realizations from NPAs enable banks to unlock capital and resources invested therein and release them for productive uses, leading to recycling of capital. Further resolution of NPAs brings the underlying assets back to productive use with attendant gains.

Thus, the recycling of capital in the economy in a timely manner is the underlying premise of the attempt to resolve problems associated with NPAs.

An Attempt to find a Solution

The Financial Committee or the Committee on Financial System (‘CFS’) (also known as the Narsimhan Committee I), submitted a report in 1991 which dealt with non-performing assets and methods to speed up the process of recovery, in detail. It upheld the recommendations made by the Tiwari Committee appointed by the Reserve Bank of India in 1984 to expedite the adjudication and recovery of debts due to banks and financial institutions and also suggested a comprehensive legislation to deal with industrial sickness. Therefore the CFS suggested the setting up of a proper judicial framework to help banks and financial institutions enforce claims against their clients quickly, thereby leading to the reorganisation of the banking sector. It also proposed the establishment of an Asset Reconstruction Fund (ARF) which would take over from the banks and financial institutions, a portion of bad and doubtful debts at a discount. But at the same time the banks had to pursue recovery of their bad and doubtful debts through the special Debt Recovery tribunals (‘DRTs’) set up under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

However the suggestions for setting up Asset Reconstructions Funds were not accepted and hence they were not established. Even though the DRTs were fully operational, there was a need to strengthen the recovery process of banks and financial institutions for they had a huge amount of non-performing assets totalling approximately Rs.

85,000 crores as of March 2002. 

The entire process of recovery of overdue loans through the DRT’s was progressing very slowly. Therefore, in 1997, the Government set up another Committee under the Chairmanship of Shri. M. Narsimhan, which was the second committee on Banking Sector Reforms(also called Narsimhan Committee II).

It reviewed the implementation of the CFS recommendations. It stated that re-emergence of new NPAs could be prevented only by strict application of prudential norms. This committee suggested the setting up of an Asset Reconstruction Company (‘ARC’) to whom the non-performing assets could be transferred which would in turn return to the banks NPA Swap Bonds representing the realizable value of the assets transferred.

 The ARC could be set up by one bank or a set of banks or even in the private sector. This committee also recommended the setting up of an expert committee to look into the changes to be made in the legal framework. And therefore an Expert Committee under the chairmanship of Shri T.R.

Andhyarujina, former Solicitor General was set up by the Ministry of Finance. The Expert Committee had recommended the enactment of new laws for enforcement of securities for loans created over both, movable and immovable properties by banks and financial institutions and also for securitization of financial assets. A proposal was made to set up an Asset Reconstruction Corporation by an Act of Parliament. Since conceptually securitization and reconstruction involve assignment of receivables and raising money from investors and to facilitate such investments, power of enforcement of securities was to be given to a Special Purpose Vehicle or Trust holding financial assets for the benefit of the investors, all the three concepts were consolidated to enact a single piece of legislation.

This consolidation culminated into the promulgation of an ordinance by the President of India on 21st June 2002. It was re-promulgated by the President on 21st August 2002. 

The Bill for the conversion of the Second ordinance into an Act was passed by both the Houses of Parliament in the Winter Session of 2002 and received the assent of the President on 17th December 2002. With the passing of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 the important recommendations of the Narshimhan II Committee for speeding up the process of recovery was implemented. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was a milestone which provided for a number of financial sector reforms. It provided for certain important activities in the financial sector like: Securitisation of financial assets Reconstruction of financial assets Recognition to any security interest created for due payment of a loan as security interest under the Act, irrespective of its form. 

Power to enforce such security to the banks and financial institutions, in the event of default without intervention of the Courts and Enabling provision for setting up a Central Registry for the purpose of registration of transactions of securitisation, reconstruction and creation of security interests.

Before the enactment of this Act, banks and financial institutions had no option but to enforce their security interests through the court process, which was extremely tedious. Several provisions of the Uniform Commercial Code of the United States of America which aimed to introduce uniform system of law for the whole country and certain new concepts for trade, commerce and security were incorporated in the SARFAESI Act, 2002. 

The Constitutional validity of this Act was questioned in the case of Mardia Chemicals v.

Union of India. The Act was held to be constitutional by the Supreme Court except certain sections which were later deleted. The judgement in the Mardia Chemicals case is an important landmark in banking law as it recognised certain legal principles introduced by the SARFEASI Act in our legal system. It recognized, inter alia, that any security created over movable or immovable property for securing due payment of money advanced or to be advanced or for performance of any obligation undertaken by any bank or financial institution is treated as security interest. The consequence of this principle is that any security created in the property or asset of the borrower will be treated as interest held by the lenders in such a property or asset.

Any such security interest can be made enforceable by the secured creditor in the event of a default. 

The rights of enforcement conferred on secured creditors are recognized by the Apex Court and the defaulting borrower will be allowed to question the exercise of such powers by a secured creditor only after the secured assets are possessed. The only restriction placed on the secured creditor was stated in Jagdamba Oil Mills v. Haryana SFC whereby the court held that the acts of the creditor should be fair and reasonable and in accordance with the provisions of the SARFAESI Act. Thus this Act enables banks and financial institutions to realize their long term assets, manage problems of liquidity and improve recovery by exercising powers to take possession of security, sell them and reduce Non Performing Assets (NPA) through measures for recovery or reconstruction within the framework of the Act, the rules framed there under and the guidelines and notifications issued pursuant thereto, by the Reserve Bank of India (RBI). The securitisation and reconstruction companies acquire NPAs from banks and financial institutions by raising funds from Qualified Institutional Buyers (as defined in the Act).

Such funds are raised by the issue of Security Receipts (as defined in the Act) representing undivided interest in such financial assets. This relieves banks and financial institutions of the burden of NPAs and allows them to focus onA their core area of lending and banking business.

The Solution: Asset Reconstruction Companies

Asset reconstruction companies (ARCs) have been set up in various countries in response to the global problem of bad loans. Non-performing loans arise primarily due to two reasons- bad lending decisions, and systemic banking crisis.  It is in the latter case that banking regulators or governments try to bail out the banking system of a systematic accumulation of bad loans which acts as a drag on their liquidity, balance sheets and generally the health of the banking sector.

So, the idea of ARCs is not to bail out banks, but to bail out the banking system itself. Asset reconstruction companies assume bad assets from other companies to clear them from that company’s books. It may purchase the assets at a discounted price, causing the original company to incur a loss. 

However, clearing NPAs can allow it to start assessing the financial health accurately. Further it also helps the company to work on a recovery plan. Once it takes possession, it can work on recovering those assets.

For example, an asset reconstruction company may assume a group of home loans in default. The company can pursue collections and if this does not work, it can start foreclosing and selling the properties in order to extract cash from the loans and close them out.

The asset reconstruction company specializes in this activity and can handle the process more efficiently than a regular financial institution, because it has the personnel, experience, and support network to do so. It may own a real estate firm that can handle the process of evaluating the properties, listing them, and making any necessary modifications to make them more saleable. 

For companies with bad loans on their books, asset reconstruction creates a possibility to repair their financial situation and meet the needs of shareholders and other investors. NPAs can become a serious liability and may contribute to a crisis in investor confidence as people become concerned about the possibility of the bank filing for complete bankruptcy. Through asset reconstruction, the company can write down the assets, sell them, adjust its books, and move forward.

In India the activity of asset reconstruction need not be carried on by the Government alone, it can be undertaken even by a private company subject to the condition that a single sponsor will not be a holding company of such reconstruction company, or otherwise hold any controlling interest in such company. 

The term Asset Reconstruction has been defined in Section 2(1) (b) of the SARFAESI Act. As provided by the Act it means acquisition of any right or interest of any bank or financial institution in any financial assistance for the purpose of realization of such financial assistance. This definition reduces the complex exercise of asset reconstruction as a simple takeover of loans and advances of banks and financial institutions for the purpose of recovery. The definition also puts into rest the debate as to the manner in which the exercise of asset reconstruction should be undertaken. 

A Securitisation or Reconstruction 

Company registered under Section 3 of the Act previously had the status of a public financial institution till Section 4A of the Companies Act was amended by the Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Act, 2004. After this amendment, clause (vii) of sub-section (1) of section 4A of the Companies Act has been deleted.

Thus the securitisation and reconstruction companies ceased to be public financial institutions with effect from 11th November, 2004 (which is the date on which the Amendment Act became effective). All the same, the Amendment Act also amended the definition of financial institutions contained in Section 2(h) by addition of sub-clause (ia) to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act ) and securitization and reconstruction companies have become financial institutions for the purpose of the DRT Act. The securitization company or reconstruction company registered by the RBI under the Act was conferred the status of public financial institution under Section 4A of the Companies Act which was later amended and the status of public financial institution was withdrawn. 

At present the securitization or a reconstruction company is included in the definition of financial institution under the Recovery of Debts Due to Banks & Financial Institutions Act, 1993. A securitization or reconstruction company will be engaged in the activity of acquiring financial assets from banks and financial institutions.

Such financial assets consist of loans and advances sanctioned by the lenders and the underlying securities. On acquisition of such assets, the securitization or reconstruction company will be considered to be the lender and is also deemed to be engaged in financial business within the meaning of clause (c) of section 45-I of the RBI Act, 1934. Thus a securitization or reconstruction company will require registration under the RBI Act, 1934. 

However, the SARFAESI Act has created a new category of financial companies with a separate system for registration and regulation by the Reserve Bank of India. While Section 45-I(c) deals with companies engaged in non-banking financial business, the SARFAESI Act deals with companies engaged in the business of acquiring and recovery of loans and advances made by banks. Thus the SARFAESI Act is a special law dealing with only a specific category of Companies and since the law is later in point of time it prevails over the general law contained in the RBI Act.

Hence the securitization or reconstruction company will not require registration under Section 45-I(c) of the RBI Act. However to leave no room for doubt the RBI has issued a notification under section 45NC of the RBI Act, 1934 exempting securitization or reconstruction companies from the applicability of provisions of section 45-IA, 45-IB and 45-IC of the RBI Act by its Notification.

Registration Section 3 of the SARFAESI Act deals with the registration of securitization or reconstruction companies. Under the provisions of this Act securitization or reconstruction are considered as similar activities and provisions relating to registration with Reserve Bank and other conditions are made applicable to both activities. Paragraph 4(ii) of the Securitization Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 provides that a securitization or reconstruction company, which has been registered under Section 3 of the Act, can undertake both securitization and asset reconstruction activities. The Act allows the acquisition of financial assets of banks and financial institutions by any securitization or reconstruction company and enables them to raise funds for the acquisition by issue of security receipts.

Thus it provides a legal framework for securitization of standard loan assets and also of non-performing assets of banks and financial institutions. 

Application for Registration 

Application for registration is to be made to the Reserve Bank in such a form and manner as maybe prescribed by it. The Reserve Bank may inspect the records and see that all the conditions specified in the Act from clauses (a) to (g) are complied with to register a company. Also according to clause (h) the company has to comply with the conditions stipulated in the RBI guidelines before it can be granted registration. Conditions for Registration The provisions for registration of a securitisation and reconstruction company are enumerated in Section 3 of the SARFAESI Act. Every securitisation/reconstruction company which intends to obtain the Certificate of Registration should have owned funds of not less than Rs.

Two Crores or such other amount not exceeding fifteen per cent of the total financial assets acquired by such companies. 

The Reserve Bank of India will specify such sum by the issue of a notification in this regard. If the securitization or reconstruction company is already carrying on business, then it should not have incurred losses in any of the last three preceding financial years. Foreign Direct Investment in Asset Reconstruction Companies Since the enactment of the SARFAESI Act, foreign investors have expressed interest towards the investment in the Asset Reconstruction Companies. After a long period the Reserve Bank of India has allowed foreign direct investment in the capital of reconstruction companies registered with it subject to certain conditions that: Maximum foreign equity shall not exceed 49% of the paid up equity capital of ARC.

When investment by an individual entity exceeds 10% of the paid up capital, ARC should comply with the provisions of section 3(3)(f) of the SARFEASI Act. Also investment in security receipts issued by the reconstruction companies is to be cleared by RBI and it is now permissible for FIIs to invest in security receipts. 

Approaches to Asset Management

International experience suggests that two strategies are generally followed for realization of the NPAs from the perspective of the banking system. The first strategy states that it is best to leave banks to manage their own bad loans by giving them incentives, legislative powers, or special accounting or fiscal advantages. The second approach proposes the same thing on a concerted, central level, through a centralised agency or agencies. The former approach is called the decentralised approach and the latter is called the centralised approach.

ARCs are created as a part of the second approach – that is, a centralized agency for resolving bad loans created out of a systematic crisis.’ The intermediation by ARCs in the NPA resolution process becomes critical as ARCs would have debt aggregation capability and capability to build necessary skill-sets which are critical to successful resolution. ARCs possess the ability to aggregate debt of different classes and thus they would be in a better position to address inter-creditor issues. 

The debt aggregation capability would also provide better control and leverage over the creditor in implementing a desired resolution strategy.

In India, the task of deciding between the two broad approaches was entrusted to a special committee set up by the Government of India called the Committee on Weak Public Sector Bank, commonly referred to as the Verma Committee, 1999. This Committee came to the conclusion that in the Indian system it would be “desirable to develop a structure which will combine the advantages of government ownership and private enterprise. The broad structure would be that of a government owned Asset Reconstruction Fund (ARF) managed by an independent private sector Asset Management Company (AMC).”  The Indian model of asset reconstruction companies differs substantially from the global model of companies formed to resolve systemically impaired loans. 

Briefly, the chief differences are: Globally, asset management companies were formed to resolve loans that went bad because of a systemic crisis, not loans that went bad because of bad lending. In India, there is no finding that the loans which have gone bad in the past have suffered a systemic crisis.

In fact, there is no evidence of a systemic or market crisis in India at all. Hence the approach has nothing to do with managing the evils of a system breakdown. India is the only country where reconstruction companies have sprung up as a business model, with special statutory powers granted by the lawmakers. There is no doubt that dealing with distressed assets is a global business, but in no other case has the government come forward to grant special incentives or special legal powers to profit-oriented asset management companies. India is also the only country where asset reconstruction companies do not have a sunset clause.

In most other countries, asset management companies came in response to a crisis. Crisis resolution measures cannot be everlasting or they will lose their meaning.

Functioning of Asset Reconstruction Companies

Although the legal system in existence prior to the enactment of the SARFAESI Act was not hostile to the ARCs, it was thought fit to strengthen the law and equip ARCs with special powers over the defaulters. The Act provides for transfer of the financial assets (loans, debentures, etc. but not shares of the borrower, unless the shares are collateralized for the loan) from banks and institutions to ARCs.

The acquisition would typically take place by way of assignment of rights title and interest in favour of ARC’s on a ‘true sale’ basis. Upon acquisition, the ARC become the legal and effective owners of financial assets acquired, and takes the place of lenders. The Act also enables acquisition of financial assets through securitization. The assets are acquired by way of setting up of trusts by the ARC. 

The financial assets are held in such trusts for the beneficial interest of investors. Section 9 provides that the six measures for reconstruction of assets acquired by Securitization or Reconstruction Company: 

1. relate to proper management of the borrower’s business. 
2. is the lease or sale, wholly or partly, of that business. 
3. is rescheduling of the debt. 
4. is enforcement of the security interest. 
5. is settlement of the debt, 
6. is taking possession of the secured asset in question. 

This section begins with a caution that its provisions will take effect “without prejudice to the provisions contained in any other law for the time being in force”.

This means that if a securitization or reconstruction company seeks to take any of the measures laid down in Section 9, it will have to act in a manner consistent with the applicable requirements of all other laws. In this context, reference must also be made to Section 37 which categorically saves the operation of other laws (except to the extent of inconsistency referred to in Section 35.) For all these reasons, the wording “any other law for the time being in force” in Section 9 must be necessarily read as “any law for the time being in force (including this Act)”.

This ensures that Section 9 of this Act does not have overriding effect over any other provisions of the Securitization Act or any provision of any other law. 

Measures (a) and (b) of Section 9 may be considered together as they both pertain to the borrower’s business. For ensuring proper management of the borrower’s business, the securitization or reconstruction company has to first bring about a change in, or a take-over of, the management of business. A change in management can be effected by reconstituting the borrower’s board of directors or changing other persons in charge of management. For a take-over, the securitization or reconstruction company has to step into the shoes of the borrower.

Similarly, for selling or leasing the borrower’s business (under clause (b) of Section 9), the business has to be first taken over by the securitization or reconstruction company. These guidelines laid down in April 2010 lay down the eligibility conditions and grounds based on which securitization and reconstruction companies may exercise powers to effect change in or take over the management of the business of the borrower for realizing their dues. SCs/RCs should frame policy guidelines in this matter with the approval of their Board of Directors. 

Measures (c) and (e) may be analyzed together as both relate to payment of debt by the borrower. The first concerns re-schedulement of debts by the securitization or reconstruction company. Rescheduling can take place even unilaterally, that is to say the company can reschedule the debt even in the absence of a request from the borrower.

In that case the conditions, if any, attached to the revised schedule by the company may not bind the borrower. However a mere default by the borrower cannot legally be regarded as the borrower’s (even tacit) acceptance of the revised schedule attached with the condition. On the other hand, if a re-schedulement takes place on the application of the borrower, a condition as above can form part of the revised schedule. In such a situation, the condition will be binding on the borrower and the consequences arising there from will naturally follow.

Measures (d) and (f) have the same subject matter namely; security interest or the underlying secured assets. These measures can be resorted to only in the manner laid down in the other provisions of the Act and Section 13 in particular. Section 10 deals with Other Functions of Securitization and Reconstruction Company. 

According to Section 10, a securitization company or reconstruction company registered under Section 3 can also undertake other business such as acting as agent of the bank or financial institution for recovery of their loans and charge fees for such work. In other words, without acquiring the financial assets from the banks and financial institutions, such banks can undertake recovery work on agency basis. The agency function acts as a dual edged sword so far as the borrower is concerned as these companies have sweeping powers under the Act and can take over the role under Section 5 and Section 9 which may be prejudicial to the overall interest of the borrower.

The borrower would be under constant pressure to pay the amount in default to the extent possible to avoid any action under Section 5 and Section 9 of the Act. Such company can also be appointed as a Manager for the secured assets, the possession of which is taken by any bank or financial institution.

These companies can be entrusted with the role of ‘manager’ as per the section 13(4) of the Act. This would help them to specialize in the activities which are related to the enforcement of security and reconstruction. Also, such company can act as a receiver if appointed by any Court or Tribunal. 

Under the scheme of the Act a securitization company or reconstruction company can undertake multiple schemes of securitization or reconstruction but such company cannot undertake any other business without the approval of the Reserve Bank of India. To allow such companies to expertise in the field of managing impaired assets and recovery of such assets, specific provision has been made for such companies to undertake recovery for lenders as well as acting as a manager or a receiver.

Since banks and financial institutions are given the powers of enforcement, it may also be possible to delegate such powers to a securitization or a reconstruction company, while entrusting recovery assignments to the company, thereby expediting the recovery process.

Asset Reconstruction Companies: Boon or Bane?

Finally we come to the question whether the establishment of Asset Reconstruction Companies has been a boon or bane to the Indian economy. The major objective of the ARC is to acquire and rapidly liquidate Non Performing Assets which helps to accelerate the process of corporate restructuring. Thus, they clean the books of accounts by reducing non-performing assets and banks have to deal less with non performing clients as realization of cash from every defaulting borrower will be a lengthy and cumbersome process. This will help the banks to focus better on managing their core business activities. They also play an important role in developing capital markets through secondary asset instruments. 

The SARFAESI Act can be said to be very liberal as regards the setting up of an ARC as anyone with the required capital and otherwise satisfying the registration requirements under the SARFAESI Act can set up an ARC.

The important question however is whether the ARC has any distinctive powers that enable it to turn non-performing assets into performing assets. An analysis of the Act reveals that the Act falls short in this regard. The powers granted to the ARC are quite vague and general and are not very different from the powers granted under the same law to the secured lender as well. In fact, given the privity of contract, a secured lender would possibly be seen by the judicial system of the country as better equipped to realize NPAs than a separate ARC.

Since the ARC field is an open-to-all playground, it is very likely to invite the so-called vulture investors, and it is quite likely that the ARC may be seen by the judicial system as predators on the prowl. Moreover the recent years have been very discouraging for the ARCs. They have faced situations where they have been asked to bid by banks that have a large number of NPAs. But in various circumstances we see that the banks cancel the sale on the grounds that the price offered by the ARCs is too low and does not meet the expectations of the banks. 

The bank, after receiving a large number of bids, also cancels the sale on the grounds that there is a large gap between the price offered by ARCs and the bank’s expectation – the bank, however, never discloses the price. ARCs cynically see this as an exercise by banks to gauge the market value of their distressed assets.

As a result, relationship between the banks and ARCs is no longer the same. By shrinking balance sheets through the disposal of unproductive assets (no interest income accrues on bad loans), banks were also able to relieve capital adequacy worries. Initially the asset reconstruction business was in full swing.

Banks saw ARCs as convenient partners to sell NPAs in order to clean up their balance sheets, without having to pursue a rigorous alternative of recovering dues directly from defaulting borrowers. This way they shrunk their balance sheets through the disposal of unproductive assets. But now, after cleaning their balance sheets to a level where NPAs are no longer a cause of worry, they feel ARCs have little to offer.

A  Thus banks today are under no pressure to sell bad loans and this has affected the business of the ARCs to a large extent, who survive only by buying bad loans from banks and financial institutions and creating value out of it.A Since the past few years the system has witnessed a near-stagnancy in the size of NPA transactions, which has forced ARCs to look for other alternatives and thus, this industry faces a very uncertain future. As on March 2010, the banking system was sitting on bad loans to the tune of 1.21 lakh crore.

Of this, ARCs purchased just about 1,500 crore of NPAs.A Therefore at the end of six years of operation, the combined recovery of all ARCs works out only to 31.9% of the acquisition price paid. It is believed that some of the main constraints for the low take-over by the ARCs are the various operational issues, preference for cash transactions over security receipts against bad loans by the banks, price and information asymmetry among buyers and sellers. The legal framework for asset recovery and stamp duty also poses a challenge to these ARCs.

A The ARCs have not been performing the way it should be. As quoted by S Khasnobis, managing director & CEO of Arcil, the country’s first and largest ARC, “Some 10 years back, pressure mounted on banks to sell NPAs as they were saddled with high bad loans accumulated over the years. The pressure has almost gone now as most banks have already cleaned their books and loan restructuring window is open for them in one form or the other.” Banks have also become more efficient in managing their NPAs and improved their recovery mechanism by removing several impediments. In conclusion we have to remember that the main aim of the ARCs is not only disposal of NPAs; this can be done even by enforcement agencies.

The real problem will get solved only if ARCs do two things, firstly tackle recalcitrant borrowers (which the SARFEASI Act is supposed to do) in order to make good recovery from NPAs that still have value and secondly rehabilitate revivable sick cases. In order to break the logjam, certain steps can be undertaken. 

Firstly, the SARFEASI Act must be amended to confer extra powers on ARCs so as to instil responsible behaviour on the part of recalcitrant borrowers. Then the present definition of NPA is restrictive due to which a very large number of NPAs sitting on the books of important players in the economy such as Co-operative Banks, State Financial and Investment Institutions, Mutual Funds, Insurance Companies NBFC’s are beyond its ambit. The ARCs will be able to play a much larger role and deal with the problem of NPAs in a better manner, if the impaired assets of other players are also included within the functioning of the ARCs.

Conclusion

Through this paper, the authors have tried to provide a brief yet comprehensive overview of the concept of ARC’S and the role they have played in the Indian Economy.

The problem of NPA’s as a being a natural byproduct of the business of lending has been explained and the manner of introduction of ARCs as a counter measure to this problem was discussed. The provisions under the SARFAESI Act for the established and registration of ARC’s were also discussed under the relevant sections. The decentralized and centralized approach was also illustrated and the Indian approach to asset management was dealt with in detail. The differences between the Indian approach to asset management was also compared to other approaches prevalent globally. 

The functions of ARC’s as enumerated under Section 9 and 10 of the SARFAESI Act have also been duly elucidated. Finally, the authors have given their views on the effect ARC’s have had on the economy and have suggested improvements which could be made.

The concept of Asset Reconstruction was introduced at a time when the financial services industry was being transformed globally and India adopted it as an experiment. A time has now come when a clear understanding of these systems and concepts is essential and this can only be brought about by clear, unambiguous law.

The faster our legislature is able to provide this, the better for our economy.

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