ASSET RECONSTRUCTION

Asset Reconstruction means to manage and recover Non Performing Assets (NPA’s) purchased from the banks. The job is to bail out banks from the pile of bad loans in which it is sitting. 

So, here comes the Asset Reconstruction Companies ( ARC’s). Their job is to clear the bad assets (NPA’s) from the books of companies. For example, it can handle some of the cases of home loan defaults and pursue the defaulters to pay the sum due. If they do not respond then ARC’s may start foreclosing and selling the properties to extract cash from the defaulted loan amount. They specialize in such activity and can handle them more efficiently because they have the required manpower, experience and support network to do so. 

Now, whether ARC’s always make profits. Not always. They purchase bad loans from the banks at a discount and then they take steps to recover that money. If they able to recover the money, they make a profit, otherwise they lose money. 

How ARC’s purchase assets? 

The Asset Reconstruction Companies purchase assets in the following manner and the whole process is closely monitored by the banking regulator: 

(i) Raising Funds - Asset Reconstruction Companies are allowed to raise funds from Qualified Institutional Buyers only in order to make payment to buy discounted debts from banks. They raise fund through the issue of security receipts to QIB’s. The security receipt gives the QIB a right, title or interest in the financial asset that is brought by the ARC. ARC’s also issues debt instruments or even sells equity to raise funds. Further, they have to take a special precaution that retail investors are excluded from it. The reason is that ARC’s are highly risky and only QIB’s are able to withstand such risk in case of a loss. 

(ii) Partnership Method – Many times, ARC’s do not directly buy debts from the banks. They remain on the banks books. And, the bank hires the ARC to do the debt recovery process. Whatever revenue generated is divided between banks and ARC in a predetermined manner. 

Evolution of Asset Reconstruction Companies in India 

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 has come into force with effect from 21stJune, 2002 for establishment and

operation of the Asset Reconstruction Companies. The main aim of the act is to empower banks and financial institutions to take the possessions of the securities and sell them without the intervention of the court. 

Steps to be taken by ARCs against defaulting borrowers? 

Following steps are to be taken by ARCs against defaulting borrowers in accordance with the guidelines issued by RBI: 

• Change or take-over of the management of the borrower. 

• Sale or lease of a part or whole of the business of the borrower. 

• Re-scheduling of payment of debts payable by the borrowers. 

• Enforcement of security interest in accordance with the provisions of the Act. 

•  Settlement of dues payable by the borrowers. 

Taking the possession of secured asset in accordance with the provision of the Act. 

Benefits of Asset Reconstruction: 

· The task of ARCs is to purchase and pool the NPAs of various lenders to quicken the process of recovering dues defaulted by the borrowers. 

•  So, the next benefit is to quickly liquidate the NPAs. 

• Cleaning of books of account by reducing NPAs. 

• Provide a way out to deal with defaulting clients (borrowers).