ASSET RECONSTRUCTION COMPANY (Syllabus: GS Paper 3 – Economy)

Context: The Reserve Bank of India (RBI) has come down heavily on asset reconstruction companies (ARCs) for violating norms and warned them of regulatory or supervisory action in extreme cases.

Asset Reconstruction Company (ARC)

• About: It is a financial institution that buys the Non Performing Assets (NPA) or bad assets from banks and financial institutions so that the latter can clean up their balance sheets.
• Regulatory Framework: RBI issues the Master Direction - Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024, to ensure prudent and efficient functioning of ARCs and to protect investor interests.
• Capital Requirements: ARCs are required to have a minimum net owned fund (NOF) of Rs 300 crore to commence the business of securitisation or asset reconstruction, and maintain this level on an ongoing basis.
• Investment Restrictions: ARCs are restricted from investing in land or buildings, except for their own use, up to 10% of their owned funds.
• Limitations: Prohibited from raising money through deposits, ARCs must maintain a capital adequacy ratio of at least 15% of their total risk-weighted assets.
• Government Initiatives: In the Union Budget 2021-22, Finance Minister Nirmala Sitharaman announced the establishment of Asset Reconstruction Companies in India to address Non-Performing Assets (NPAs) of stressed banks. 

o These companies are set up by both state-owned and private-sector banks, without equity contribution from the government.

• Role of ARCs: To facilitate the cleaning up of bank balance sheets by acquiring financial assets through auctions or negotiations, and then securitizing and reconstructing these assets to inject liquidity into the system.