Role of the Asset Reconstruction Company (ARC) in the banking sector

We need to know about Asset Reconstruction Company first, so, it is a company where we can sell our loans. So, ARCs buy bad loans from the banks or financial institutions and the minimum net owned funds of an IRC is 100 crores. Now, some examples of an ARC are, the asset reconstruction company India limited (ARCIL), the Edelweiss ARC, Reliance ARC limited, etc. NPA needs to be acquired at a fair price by the ARCs. They can actually change the management cell or the business structure that enters into settlements and they can enforce the security interest if 75% by value of all secured creditors agree to exercise this right. So, if all of these people agree then they can go ahead and sell the different assets, and thus, get the money to resolve all of these things. The ARCs, although there was a lot of fanfare when they started because internationally ARCs are very popular. In India, their performances have not been great. So, there has been a call for a public sector bad bank which is the PARA and this is called the Public Asset Rehabilitation Agencies. So, some people are saying that government should make a body like this, so that, this public sector body will be buying all the bad loans and we can resolve it very very well. So that is all about the ARCs.

Bank’s Haircut

Talking about the bank’s haircut, so, for example, you had a loan of 10 lacs but you are only able to just have 6 lakh recoveries. Then the four lakh that you have, is the haircut. So, any kind of haircuts the bank has to take when you are selling a loan to the asset reconstruction company because just imagine that if you have a large amount of loan. Then, the ARCs have to make money. So, the ARC will buy the loan from you at 6 lakhs, and then maybe they are going to get maybe 7 lakhs or 8 lakhs finally resolution. So, that is how the ARCs make money and so this is all about the bank’s haircut.

NPA Restructuring

Now, talking about the NPA restructuring, so this is the various kinds of schemes that the bank just brings out. So, you might have heard about the SBI’s Rinn Samadhan scheme. So, the Rinn Samadhan scheme is that, if the borrower has been defaulting, they are given some options, it is called one-time settlement scheme or the OT scheme. So, there, they can say that we are going to reduce your payment, or we are going to wave off the interest, or we are going to reduce the tenure of the loan, etc. They will be given some incentives that you give the cash to us now and we are going to forgive your loan. So that is the OT scheme and basically what is done is the change of tenure. So, the change of the repayment period, so that, people do not have to repay the loan immediately but they can have some more time to repay or they are waiving the interest as well sometimes. Sometimes, the principle is waved but that is very rare.

Central Repository of Information on Large Credits (CRILC)

Talking about the CRILC, so this is the Central Repository of Information on Large credits. It is maintained by RBI for borrowers which have exposures of 5 crores or more. So, any borrower who has exposure of 5 crores or more, the details of that you can find in the CRILC. So, each and every bank, they have to send a quarterly report. So, quarterly, they will be sending a report to the RBI and that is how the CRILC is maintained by the RBI. So, any loans of 5 crores or more you have to send to CRILC.