Asset Reconstruction Companies (ARCs)
Why in news?
Recently, SEBI allowed all Non-Banking Financial Companies (NBFCs) to invest in security receipts (SRs) issued by Asset Reconstruction Companies (ARCs).
- SEBI also allowed Housing Finance Companies (HFCs) to invest in them.
- This move aims to enhance participation in the stressed asset market and improve liquidity.
Relevance:
GS-03 (Economy)
What are security receipts?
- Security Receipts (SRs) are financial instruments issued by Asset Reconstruction Companies (ARCs).
- ARCs issue these security receipts to investors when they acquire Non-Performing Assets (NPAs) or bad loans from banks and financial institutions.
- These receipts represent the holder’s share in the underlying distressed assets and are redeemed when the ARC recovers the money from the borrower.
How do security receipts work?
- Purchasing of NPAs: At first the ARCs purchase NPAs from banks after an agreed-upon haircut (discount on loan value).
- Issuance of SRs: Instead of paying the full amount upfront, ARCs issue Security Receipts (SRs) to investors, including banks, financial institutions, and now NBFCs.
- Loan Recovery Process: ARCs work to recover dues from defaulters through restructuring, settlement, or legal action.
- SR Redemption: Investors receive returns based on the amount recovered from distressed assets.
Advantages of the Move
- Increased Investor Participation: Expands the pool of qualified buyers, enabling NBFCs to acquire security receipts and boosting market depth.
- Better Liquidity for ARCs: Enhances liquidity in the distressed asset market, allowing ARCs to efficiently manage and resolve bad loans.
- Improved Financial Stability: strengthens the financial ecosystem by enabling more institutions to participate in asset resolution, reducing banking sector stress.
- Encouraging Credit Growth: With better liquidity and asset resolution, financial institutions can extend more credit, supporting economic growth.
Prelims Question:
Consider the following statements:
- Asset Reconstruction Companies (ARCs) are registered with RBI for the purpose of converting illiquid assets into liquid assets.
- They are regulated by the Ministry of Finance.
- “Bad bank” and “ARC” (Asset Reconstruction Company) are essentially the same thing.
Which of the statements given above is/are correct?
(a) 1 and 3
(b) 2 and 3
(c) 1 and 2
(d)1, 2, and 3.
Answer: (a) 1 and 3
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