NPA Crisis

RBI flags supervisory concerns over ARCs functioning


From UPSC perspective, the following things are important :

Prelims level: Asset Reconstruction Companies, SARFAESI Act, 2002;

Mains level: NA

Why in the News?

  • After the allegations of ‘unethical practices’ by ARCs, including aiding defaulting promoters, the RBI intervened, with the Deputy Governor urging integrity and ethical conduct in their operations.

The new guidelines laid out by the RBI:

  • Enhanced Capital Requirements:
    • Minimum Capital Requirement Increase: ARCs are now mandated to maintain a minimum capital requirement of Rs 300 crore, a significant increase from the previous Rs 100 crore stipulation established on October 11, 2022.
    • Transition Period for Compliance: Existing ARCs are granted a transition period to reach the revised Net Owned Fund (NOF) threshold of Rs 300 crore by March 31, 2026.
    • Interim Requirement: However, by March 31, 2024, ARCs must possess a minimum capital of Rs 200 crore to comply with the new directives.
  • Supervisory Actions for Non-Compliance:
    • ARCs failing to meet the prescribed capital thresholds will face supervisory action, potentially including restrictions on undertaking additional business until compliance is achieved.
  • Expanded Role for Well-Capitalized ARCs:
    • Empowerment of Well-Capitalized ARCs: ARCs with a minimum NOF of Rs 1000 crore are empowered to act as resolution applicants in distressed asset scenarios.
    • Investment Opportunities: These ARCs are permitted to deploy funds in government securities, scheduled commercial bank deposits, and institutions like SIDBI and NABARD, subject to RBI specifications. Additionally, they can invest in short-term instruments such as money market mutual funds, certificates of deposit, and corporate bonds commercial papers.
    • Investment Cap: Investments in short-term instruments are capped at 10% of the NOF to mitigate risk exposure.

About Asset Reconstruction Company (ARC):

About ARC is a special financial institution that acquires debtors from banks at a mutually agreed value and attempts to recover the debts or associated securities.
  • ARCs are registered under the RBI.
  • Regulated under the SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act).

(Note: For reading more details on SARFAESI Act you can visit on our article named “RBI asks for SARFAESI Act Compliance” of Sept 2023)

Objective ARCs take over a portion of the bank’s non-performing assets (NPAs) and engage in asset reconstruction or securitization, aiming to recover the debts.
  • Asset Reconstruction: Acquisition of bank loans or other credit facilities for realization.
  • Securitization: Acquisition of financial assets by issuing security receipts.
Foreign Investment 100% FDI allowed in ARCs under the automatic route.
  • ARCs are prohibited from undertaking lending activities.
  • They can only engage in securitization and reconstruction activities.
  • Bank with NPA agrees to sell it to ARC at a mutually agreed value.
  • ARC transfers assets to trusts under SARFAESI Act.
  • Upfront payment made to bank, rest through Security Receipts.
  • Recovery proceeds shared between ARC and bank.
Security Receipts Issued to Qualified Institutional Buyers (QIBs) for raising funds to acquire financial assets.
  • Banks can clean up their balance sheets and focus on core banking activities.
  • Provides a mechanism for resolution of NPAs and debt recovery


[2018] With reference to the governance of public sector banking in India, consider the following statements:

  1. Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.
  2. To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

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