How do asset reconstruction companies function?

How do asset reconstruction companies function?

An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions and cleans up their balance sheets. In other words, ARCs are in the business of buying bad loans from banks. Which helps banks to concentrate on normal banking activities.

How do asset reconstruction companies make money?

Asset reconstruction companies are in the business of buying bad loans from banks. These companies then take special measures to recover the money owed. If they are able to recover the money, they make a profit, if not they lose the money.

How do NPAs affect banks?

An NPA not only makes an asset unproductive, banks also fail to recover the principal capital. On the one hand, the interest earning of the bank declines; on the other side, there is a risk of recovery of principal amount.

What is asset Reconstruction?

An asset reconstruction means acquisition by an ARC of any right or interests of any Bank or Financial Institution in any financial assistance for the purpose of realisation of such financial assistance.

Is asset Reconstruction company an NBFC?

Accordingly, Asset Reconstruction Company is a company registered under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002. It is regulated by Reserve Bank of India as a Non Banking Financial Company (u/s 45I (f) (iii) of RBI Act, 1934).

What is the difference between asset reconstruction and Securitisation?

Securitization is keeping collateral to get some funds to invest in another project. Asset reconstruction is the process of converting bad assets into cash.

How are NBFCs and banks different?

NBFC cannot accept demand deposits; NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself. While banks are incorporated under banking companies act, NBFC is incorporated under company act of 1956.

Is Asset Reconstruction company an NBFC?

How does ARC work in banking?

An asset reconstruction company is a special type of financial institution that buys the debtors of the bank at a mutually agreed value and attempts to recover the debts or associated securities by itself. The ARCs take over a portion of the debts of the bank that qualify to be recognised as Non-Performing Assets.

What is ARC bad bank?

The ARC, along with an asset management company, India Debt Management Company, was proposed in this year’s Budget to take over the stressed debt of banks. NARCL, also known as a bad bank, has eight public sector banks as its shareholders.

How many asset reconstruction companies are there in India?

The Act envisaged that ARCs would be registered and regulated by RBI. Accordingly, initial guidelines were issued by RBI in April 2003. The first ARC, namely, Asset Reconstruction Company (India) Limited, was also registered in 2003. As on date, there are 28 ARCs in operation.

What is an asset reconstruction company?

An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the latter can clean up their balance sheets. In other words, ARCs are in the business of buying bad loans from banks.

How do asset reconstruction companies take over NPAs from banks?

So the Banks & an Asset reconstruction company get into an agreement whereby the ARC agrees to take over the NPAs from the Banks Balance sheet at a certain amount (Lower than the book v

How asset reconstruction companies (arcs) can help banks clear the debt?

Many of the existing Asset Reconstruction Companies do not have sufficient capital to help the banks clear the debt and over the loss faced by NPAs. Thus, setting up new ARCs with proper capitalisation can benefit both the banks and the economic condition of the country.

What are securitisation companies or reconstruction companies?

“Securitisation companies or reconstruction companies” means a company formed under Recovery of debts due to Banks and financial institutions act, 1993 and registered under the Companies Act for the purpose of asset reconstruction. How Asset reconstruction(ARC) company works.