Asset Reconstruction Companies Rahul

8/7/2019 Asset Reconstruction Companies Rahul

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In India, level of non-performing assets

with banks & FIs alarmingly highdue to:

Economic conditionPoor repayment environment

Government intervention in loan sanctions

Loan waivers

The Government of India has proactively takensteps to clean up bad loans in the banking

system.



�Securitization

�Asset Reconstruction

�

Exemption from registration of securityreceipt



�Narasimham committee II recommended

formation of ARC with a view to clean the

balance sheet of banks.�ARC is a company which is set up with

the objective of:� Taking over distressed assets (NPA) from banks

or financial institutions� To reconstruct or re-pack these assets to make

those assets saleable



�Purchase the NPA from banks & FI at a

discount as high as 75% of the original

value of the loan�NPAs can be assigned by Banks & Fis

� In turn these assets will be

reconstructed/re-packed & then sold in

the market in various forms or recoveredthrough securitization & reconstruction of

enforcement of security



�Steps taken by government of India &

RBI-

� Enactment of S

ecuritisation & Reconstuction of Financial Assets & Enforcement of security

interest act 2002 & issuing of detailed draft

guidelines by RBI

� Stengthening of credit appraisal & monitoring

system, risk based supervision, institution of

debt recovery tribunals & Corporate Debt

Restructuring (CDR) etc.



�Formation of SARFAESI Act, 2002�Enables Banks & FIs to realize long term

assets, manage problems of liquidity, asset

liability mismatch & improve recovery &reduce NPLs�An ARC may acquire an interest in financial

assets of any bank/FI�Enables SC/ARC to take possession of

secured assets of borrowers & realize thesame

�The Act also empowers the RBI to stipulateguidelines & directions to ARCs



� Centralisation of bad loans in one or few hands� The buying of impaired assets from banks or FIs

by ARCs will be able to use their time, energy &

funds for development of their business� Bank do not have to deal with problem clients� It deals with a larger portfolio, it can mix up good

assets with bad ones & make a sale which ispalatable to buyers

� It is easier to do capital-market based fundingfor an ARC than for the Banks themselves



� Asset Reconstruction Company (india) Ltd, (ARCIL)

� Assets Care Enterprise Ltd

� A SREC (India) Ltd

� Pegasus Assets Reconstuction Pvt. Ltd� Dhir & Dhir asset Reconstruction & securitisation

company Ltd

� Pridhvi Asset Reconstruction & Securitisation

Company Ltd� Phoenix ARC Pvt Ltd

� JM Financial Asset Reconstruction Company Ltd



�First Asset Reconstruction Company tocommence business of resolution of NPAs

� Initial equity of Rs.10 Cr with ICICI bank,

IDBI &S

BI to pick up 24.5% stake each(remaining to be acquired by HDFC, IDBIbank & UTI bank)

�Commenced business imediately afterenactment of the Securitisation Act, 2002

�ARCIL has launched retail NPAs resolutioninitiative throuh ARCIL-Arms (a division of ARCIL)

�Assets under management over Rs. 8000 Cr



� Minimum owned funds of RS. 2 Cr ² Sec 3� CAR of at least 15% of total final assets OR Rs.100

Cr, whichever less� Reach the level of minimum owned fund within

three months� No account to be taken whether assets are

transferred to trust� Amount continued to be held by SC/ARC until

realization of assets & redemption of security

receipts issued against such assets� May invest amount of owned fund in the security

receipts issued by the trust



�Proper management of business of

borrower

�Sale or lease of a part or whole of business of borrower

�Rescheduling of payment of debts

payable by borrower

�Enforcement of security interest�Settlement of dues payable by borrower

�Taking possession of secured assets



�Power to take over possession of secured

assets (General)

�

Taking over management of borrower·sbusiness (Special)

�To cut short legal procedures & engage

in whole sale purchase of banks bad

loans�Either sell assets or lease them & utilise

the cash flow



�Act as an agent for any bank or financialinstitution

�Act as a receiver, if appointed by any court

or tribunal�Act as a manager as in Section 13 (4) (c)�ARC not to undertake function of

securitization & no legal transfer of assets toits ownership, while carrying out functions

�Act merely as the agent of bank/FI & carryout functions as a service-provider

�Act as the Receiver of the Court, if soappointed



�Government decided to permit ForeignDirect Investment (FDI) in equity capital

�Foreign Investment Promotion Board (FIPB)

to consider applications frompersons/entities eligible to invest in India inequity capital

�Maximum foreign equity shall not exceed49% of the paid up capital

�FDI alone will be permitted, investments byFIIs will not be permitted

�Policy on FDI to be reviewed after two years& of FII investment after one year



� Ensuring participation of FIIs which would bringin new money & providing tax-exempt statuswould reduce the intermediation costs further

� Banks/FIs need to accelerate the sale of NPAs to

ARCs, thereby converting their illiquid, capitalconsuming NPAs to cash

� ARCs need to provide an early exit to the banksfrom NPAs

� Well functioning of ARCs different from other

businesses� Quality of team & resources available with them� Ability to work with the legal system



�Must have operational independence &

sufficient authority

�

There should be some kind of fiscalincentives

�Accountability & transparency are also

important

�Cost control occupies important place�There should be a mechanism to review

the working of ARC



�Debt aggregation

�Sourcing funding from co-investors

�

Working out the acquisition price�Finding a way to speed up recovery

process



�www.rbi.org.in

�www.arcil.com

�

www.financialexpress.com



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Asset Reconstruction Companies Rahul

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