A consensus on a “practical resolution” to the Rs 4.76 lakh crore bad debt problem, which was identified by the National Democratic Alliance (NDA) government in its initial days as the biggest headwind to restarting growth, is likely soon.
A proposal to push private asset reconstruction companies (ARCs) to take on the toxic assets of public sector banks is gaining traction within the government as the most practical way to resolve the banking sector mess, which is seen as hampering the Indian financial sector’s ability to fund productive sections of the economy.
What are ARCs?
"Asset reconstruction" means acquisition of any right or interest of any bank or financial institution in any financial assistance for the purpose of realisation of such financial assistance.
How Asset reconstruction (ARC) company works.
1) ARC will take over the NPA's from banks for fixed cost which is less than the NPA amount.
2) NPA is transferred to ARC along with any security which is pledged while taking loan.
3) Now ARC will issue security receipts for fixed interest rate and will raise money. (These raised money can be invested in financial institutions)
4) Now ARC will start legal procedure to sell the pledged security in the market, which takes many years depending on the complications involved. Meanwhile Money raised by issuing security receipts are used for meeting expenses of the ARC.
5) After selling the asset by clearing all litigations, ARC company will redeem (take back) the security receipts which are issued earlier for agreed price.
Profit of ARC = sale Price of security + interest on investment – purchase cost of npa – interest on security receipts – Expenses.