The word asset reconstruction company is quite familiar in India. It is used mostly in banking sectors. An Asset reconstruction company through a trust, buys stressed assets of banks and financial institutions at a discount, recover them, and earn a fee for managing the trust. In the article below read all you should know about ARC – asset reconstruction company.
What is an Asset Reconstruction Company-ARC ?
Companies that remove the NPA (non performing asset) burden from the banks. For the smooth regulation of financial system they purchase the stressed assets from the fnancial institution. (NPA-Loans that donot yeild any interest). They provide the necessary financial cushion to the toppling system and prevents it from collapsing. These companies are the direct result of the enactment of SARFAESI act 2002 (Securitisation and Reconstruction of financial assets and enforcement of security interest)
Working- They acquire the financial asset and transfer them to one or more trusts at the price acquired from the originator. ARCs make money by issuing Security Receipts (SR) to QIBs and QIBs buy those receipts. (QIB- Qualified Institutional Buyers are authorised to evaluate and invest in capital market. Banks,financialinstitutions,insurance companies)
(SR- An agreement on which ARCs promise to pay after the disposal of the stressed asset)
Example- Suppose ABC bank disburses a loan of 10cr to mr.X. After paying EMI for 1st few months he fails to pay his EMI there after. So, bank declares his assets say 4cr worth as NPA. Now with the help of SARFAESI act bank tries to recover the loan amount.
(this act empowers bank to take possession of the defaulter’s assets without court order)
The Asset Reconstruction Company buys these NPA at a lower price. Since there not here to make losses. ARCs arrange money by issuing SRs to QIBs. The originator bank gets SR for free. Since ARCs have to pay them back the loan money.