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Sometimes, the bank makes efforts to reduce its loss, clean up its balance sheet, and keep the business going in a more positive direction; Asset Reconstruction Companies can play a role in this situation.
In the world of finance, an asset rehabilitation firm is a unique breed of business. In this case, it buys the bank borrowers at a mutually negotiated price and tries to cover up the loans or connected securities with their knowledge. The Reserve Bank of India maintains a list of these entities, known as ARCs. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 governs their activities in this regard. Some of the bank’s debts that can be classified as Non-Performing Assets are taken over by the ARCs. Consequently, Asset Reconstruction Companies are in the business of repurposing assets or securitising them. Both of these situations are occasionally intertwined in the business world. The ARC acquires all of the lender’s (the bank’s) rights with respect to the loan. Qualified Buyers can provide the finances needed to acquire these types of debts.
Asset Reconstruction
Before we can understand the significance of asset reconstruction, we must first examine what it entails. All in all, it is a bank or financial institution’s acquisition of whatever rights and interests it may have with respect to loans and other credit advantages supplied by the banks for its own benefit. Financial Assistance refers to these forms of loans, guarantees, advances, bonds, and other credit facilities.
Securitisation
To put it another way, securitisation means acquiring money. Security receipts can be issued to the Qualified Buyers in any manner. An interest in the financial assets can be represented by such security draughts. Within 90 days of receiving the Certificate of Registration, every Securitisation Company can draft a “Financial Asset Acquisition Policy” with the consent of its Board of Directors, outlining the policies and guidelines that would apply. When it comes to rescheduling loans, securitisation businesses might create a policy endorsed by their Board of Directors that sets out the general boundaries for doing so.
Qualified Buyers
To put it another way, securitisation means acquiring money. Security receipts can be issued to the Qualified Buyers in any manner. An interest in the financial assets can be represented by such security draughts. Within 90 days of receiving the Certificate of Registration, every Securitisation Company can draft a “Financial Asset Acquisition Policy” with the consent of its Board of Directors, outlining the policies and guidelines that would apply. When it comes to rescheduling loans, securitisation businesses might create a policy endorsed by their Board of Directors that sets out the general boundaries for doing so.
The securities and exchange commission (SEC) has ultimately clarified the last category of QBs under section 10.1(1) of the Securities Regulation Code. It speaks about the person that the SEC can rule as qualified buyers. The SEC can rule based on such factors as monetary sophistication, net worth, experience and knowledge in financial and business matters, or the asset amount under the management. However, the clarification is set out in SEC Memorandum Circulars 6(2007) and 3(2008).
Process of Asset Reconstruction by ARC
The main intention of acquiring debts / non-performing assets is to realise their unpaid debts. However, the process is not a casual one. The Asset Reconstruction Companies have the following options relevantly:
- Change or Takeover over the management of the borrower’s business.
- Lease or sale of such business.
- Rescheduling the payment of loans – offering alternative arrangements and schemes for the payment of the same.
- Enacting the security interest offered inadequacy with the law.
- Taking control of the assets offered as security.
- Converting some parts of the debt into shares.
Type of Debts ARC can Takeover
Only NPA-classified secured loans are under the authority of the Asset Reconstruction Company. Debentures/bonds that have not been paid for 90 days must be given a notice before they may be taken over by creditors.
Conclusion
Overall, according to the guideline of RBI, the ARCs can clear up the balance sheets of banks when the latter sells these to the ARCs, which helps banks to focus on normal banking activities. The importance of Asset Reconstruction Companies is very significant for the bank. The banks can sell the bad assets to the ARCs at a mutually agreed value. Rather than going after the defaulters by wasting valuable time and effort, handing over the responsibilities to the ARCs is a profitable and comfortable step for the bank.
