The full form of ARC is Asset Reconstruction Company. An ‘ARC’, or Asset Reconstruction Company, is a financial company registered with the RBI and governed by the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act (2002). An ARC is a financial company that purchases non-performing assets (NPAs), also known as bad loans or bad assets, from banks and other financial institutions at a mutually agreed-upon price with the goal of recovering or reconstructing the bad loans and assisting financial institutions and banks in cleaning up their balance sheets.
Technically, “Asset Reconstruction” refers to the acquisition of bad debts or assets in any financial assistance by any securitisation or reconstruction firm of any bank or financial institution for the goal of realising such financial assistance.
How Does an ARC Work?
The practice of removing debts from bank balance sheets is known as ‘asset reconstruction’ in India, although the identical procedure is known as securitization in other nations. The SARFAESI Act (2002), adopted in December 2002, under which an ARC or Asset Reconstruction Company is created, aids in the reconstruction of bad assets without the intervention of the courts. Since then, several ARCs have been constructed. The RBI has the jurisdiction and power to regulate all ARCs. An ARC’s operation can be summarised in a few points:
- Through a joint agreement, the SARFAESI Act allows an ARC to buy ‘Non-Performing Assets’ (NPAs) or bad loans from banks.
- An ARC will purchase NPAs from banks at a predetermined fee that is less than the number of NPAs.They mostly buy assets in two ways – by raising funds and by partnership model.
- The ARC will then issue security receipts with a predetermined interest rate and generate further funds. The Security Receipt grants the bearer (QIB) a right, title, or interest in the ARC-purchased financial asset.
- In the course of accepting a loan, the NPAs are transferred to the appropriate ARC, together with any promised collateral.
- If an ARC’s debt is already secured by an asset, it can take ownership of that asset after a specific period of time, which is usually 60 days.
- In a separate case, if the aforementioned asset is not secured, the corporations can initiate civil cases against the creditors to recover such debts.
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