Why in the news ?

• According to a recent report, India’s banking sector will be saddled with gross non-performing assets (GNPAs) worth a staggering Rs. 9.5 lakh crore by March-end, rising from Rs. 8 lakh crore a year earlier.

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• The high level of stressed assets in the banking system, however, provide enormous opportunity for asset reconstruction companies (ARCs) which are important stakeholders in the NPA resolution process.
• GNPAs would increase to “Rs. 9.5 lakh crore as on March 31, 2018, i.e. about 10.5% of total advances, while stressed assets are expected to be at Rs. 11.5 lakh crore.” said the report.
• At the same time, it said, the growth of ARCs was expected to come down significantly owing to capital constraints. “While growth [of ARCs] is expected to fall to around 12% by June 2019, the AUM [assets under management] are expected to reach Rs. 1 lakh crore, and that is fairly sizable,” said the report.
• The report further said that with banks expected to make higher provisioning over and above the provisions made for stressed assets, they may sell the assets at lower discounts, thus increasing the capital requirement.

NPAs

• A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
• Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
• Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
• Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
• Loss assets: As per RBI, "Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value."

Asset Restructuring Companies (ARCs)

• 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. Or in other words, ARCs are in the business of buying bad loans from banks.
• ARCs clean up the balance sheets of banks when the latter sells these to the ARCs. This helps banks to concentrate in normal banking activities.
• Banks rather than going after the defaulters by wasting their time and effort, can sell the bad assets to the ARCs at a mutually agreed value.

SARFAESI Act 2002

• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002; enacted in December 2002 provides the legal basis for the setting up ARCs in India.
• Section 2 (1) of the Act explains the meaning of Asset Securitization. Similarly, ARCs are also elaborated under Section 3 of the of the Act.
• The SARFAESI Act helps reconstruction of bad assets without the intervention of courts. Since then, large number of ARCs were formed and were registered with the RBI which has got the power to regulate the ARCs.

Source

The Hindu, Economic Times and Indian Economy.