NPA Crisis

Growth of ARCs not in line with NPA trends

Note4Students

From UPSC perspective, the following things are important :

Prelims level : ARCs

Mains level : Paper 3- RBI report on ARCs

Key takeaways from the RBI report

  • The RBI report states that notwithstanding the rise in the number of Asset Reconstruction Companys (ARCs), the growth in their assets under management (AUM) has been largely trendless except for a major spurt in FY14.
  • The growth of the ARC industry has not been consistent over time and not always been synchronous with the trends in non-performing assets (NPAs) of banks and non-banking financial companies (NBFCs).
  • During 2019-20, asset sales by banks to ARCs declined, which could probably be due to banks opting for other resolution channels such as IBC and SARFAESI.
  • The acquisition cost of ARCs as a proportion to the book value of assets declined, suggesting lower realisable value of the assets.

Overview of ARCs in India

  • The ARC industry began with the establishment of the Asset Reconstruction Company India Ltd (ARCIL) in 2003.
  • Of the total AUM, about 62 per cent and 76 per cent was held by the top-three and top-five ARCs in March 2020, respectively.
  • After remaining subdued in the initial years of their inception, a jump was seen in the number of ARCs in 2008, and then in 2016.
  • Although the number of ARCs has risen over time, their business has remained highly concentrated.

Role of the government

  • Indian ARCs have been private sector entities registered with the Reserve Bank.
  • Public sector AMCs in other countries have often enjoyed easy access to government funding or government-backed.
  • By contrast, capital constraints have often been highlighted as an area of concern for ARCs in India.

Scope for new ARC supported by the government

  • The ARC proposed in the Budget will be set up by state-owned and private sector banks, and there will be no equity contribution from the Centre.
  • The RBI report supported the government’s proposal for a new ARC, saying that “such an entity will strengthen the asset resolution mechanism further.”
  • Introduction of a new asset reconstruction company for addressing the NPAs of public sector banks may also shape the operations of the existing ARCs, it added. 
  • The ARC, which will have an Asset Management Company (AMC) to manage and sell bad assets, will look to resolve stressed assets of Rs 2-2.5 lakh crore that remain unresolved in around 70 large accounts.
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