| Personal Finance |
| Page: ARC |
1. Introduction
“Asset Reconstruction Company” as per Section 2 (1) (ba) of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) (as amended in 2016 by The Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act) was defined as under:
"asset reconstruction company" means a company incorporated under the Companies Act, 2013 and registered with Reserve Bank under section 3 of this Act for the purpose of carrying on the business of asset reconstruction and securitisation”
Asset Reconstruction Companies are specialized financial institutions licensed and regulated by Reserve Bank of India established for the purpose of resolving Non-Performing Assets(NPAs) of Banks & Financial Institutions(FIs). ARCs play a crucial role in the financial sector and help banks clean up stressed loans. ARCs were aimed at bringing about a system for unlocking value from the stressed loans of banks/financial institutions (FIs). ARCs act as debt aggregators with the objective of acquiring non-performing loans from the banking system, and of managing and recovering them by putting them on the path of resolution. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002; enacted in December 2002 provides the legal basis for setting up ARCs and facilitates Banks/FIs in hastening the process of recovery, without the intervention of the courts.
Globally, these are called Asset Management Companies but in India, they are called Asset Reconstruction Companies.
Banks sell NPAs either via an auction route or though bilateral arrangements. Transactions can be in the form of only cash or a combination of cash and security receipts(SRs). However, ARCs are mandated to invest a minimum 15% of the acquisition cost as its share of investment in the SRs in each and every tranche.
The definition for various terms used, not elsewhere defined, have been summarised below:
|
Term |
Definition |
|
Cash Reserve Ratio |
specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. |
|
Charge |
where an immovable property of one person is by act of parties or operation of law made security for the payment of money to another and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property |
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Conditional Sale |
the sale of goods according to a contract under which ownership does not pass to the buyer until after a set time, usually after payment of the last instalment of the purchase price, although the buyer has possession and is committed to acquiring ownership |
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Credit Risk |
Risk of default on a debt that may arise from a borrower failing to make required payments. |
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Financial Lease |
a leasing company (the lessor or owner) buys the asset for the user (usually called the hirer or lessee) and rents it to them for an agreed period. |
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Hypothecation |
creation of an equitable charge which is created in favour of the lender by executing an agreement in respect of the movable securities of the borrower. |
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Lien |
Right of the Creditor to retain goods bailed to him against amount due |
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Liquidity Risk |
risk that a company or bank may be unable to meet short term financial demands. |
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Mortgage |
A mortgage is the transfer of interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan , an existing or future debt or performance of an engagement which may give rise to a pecuniary liability. |
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Pledge |
The bailment of goods as security for payment of a debt or performance of a promise is called 'pledge' |
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Statutory Liquidity Ratio |
reserve requirement that the commercial banks in India are required to maintain in the form of cash, gold reserves, government approved securities before providing credit to the customers |