ARC i,e, ASSET RECONSTRUCTION COMPANIES are the who take over bad loans from banks and financial
institutions at a discounted value and recover the bad debts. The difference between recovery and the value it pays is its margin.
The main aim of formation of ARC's is to clean the balance sheet of banks.A bank with NPAs
would be able to approach the ARC's for reconstructing part of its doubtful assets. ARC's will issue bonds to the respective banks for a period of 7-10 years on interest rates to be decided at the time of transcation .
Committee on Asset Reconstruction Companies has suggested that :
(i) Minimum paid up capital base should be of Rs.200 cr. and authorised capital Rs.2000 cr. With Rs.5 cr
Minimum capital to be contributed by all PSB's and selected Fis, for setup of the 1st ARC
(ii) A total of 31 lending institutions have been identified to take part in the exercise which include 27 PSBs
(iii) RBI should come up with a separate set of norms governing the functioning of ARC
(iv) The pricing of NPAs should be done through a three way consultation between the BANK/Fis , ARC's and an outside professional body.
The Asset Reconstruction Company(India) Ltd(ARCIL) is first ARC's with an initial equity of Rs.10 cr. With ICICI Bank, IDBI Bank and SBI to pickup 24.5% stake each( and remaining to be acquired by HDFC, IDBI Bank and UTI Bank)
and Mr.S. Khasnobis is the present president of this company. This firm would not need a very large equity base as it would be in a service company. ARC would form a trust which would issue units in exchange of NPAs purchased from
Banks and Fis. The trust would operate
as a no-profit organisation. It will come under the ambit of RBI and shall comply SEBI norms while issuing units to banks and FI in exchange of NPAs.
Though the government
passed the ARC Act in 2002, the same has not taken off as expected-the main reason being the inexperience of Indian companies in Debt Reconstructing.
So, to overcome this Government of India allow entry of Foreign Investors
in ARC's from November, 05.Now foreign companies including Bank can now invest up to 49% in companies involved in buying out of bad loans from other banks and institutions. This, is a major decision, which will give a fillip to the
activity of of taking out distressed asset in the country and it will now allow foreign companies to buy out NPA,s of Banks/FI estimated at over Rs. 60,000 Crore.
Allowing foreign companies to invest upto 49% in ARC's, would
also pave the way for entry of foreign banks and ARC's which are keenly waiting to enter India. It is also noticed that number of Banks and institutions like Citicorp, Merill Lynch, GE, Morgan Stanley, ING, Standard Chartered Bank
and Actis have expressed their interest in the business of managing bad loans in the country. All these players have the experience of managing bad loans in their own countries therefore this would help banks and financial
institutions unlock their funds from bad loans.