Bank Exam » Bank Exam Study Materials » General Awareness » Asset Reconstruction Company Vs Bad Bank

Asset Reconstruction Company Vs Bad Bank

This is going to be a very critical analysis of facilities prevailing in our country i.e, On one side is the ARCs and on the other is Bad bank. So, are they the same? What are they going to be discussing about these two institutions in this article? It will mostly be a comparison article by evaluating both pros and cons of the two parties.

Banks are financial institutions that indulge in the practice of money lending and borrowing. Customer base for banks is large and so is the risk. Banks tend to cut off on it losses to maintain a clean reputation, so lend money is at high risk 

This is when Asset Reconstruction Company comes into action, so now you’ll be thinking what an Asset Reconstruction Company (ARC) is?

ARC is a special financial institution that buys debts at a mutually agreed value and at last recovers the debt or securities by itself.

The ARCs are registered under the RBI and regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002). 

It is the accession of financial assets either by way of issuing security receipts to Qualified Buyers or any other means. These security receipts represent the undivided interest of two parties.

Who could buy from ARCs?

The only people who can buy from an ARC are banks, state financial Corp, trustee or ARCs registered under SARFAESI.

The list of Asset Reconstruction Company in India are given below:

  1. Asset Reconstruction Company (India) Limited (ARCIL)
  2. ASREC (India) Limited
  3. Pegasus Assets Reconstruction Private Limited
  4. Alchemist Asset Reconstruction Company Limited
  5. International Asset Reconstruction Company Private Limited
  6. Reliance Asset Reconstruction Company Limited
  7. Pridhvi Asset Reconstruction and Securitisation Company Limited
  8. Phoenix ARC Private Limited
  9. Invent Assets Securitisation & Reconstruction Private Limited
  10. JM Financial Asset Reconstruction Company Limited
  11. India SME Asset Reconstruction Company Limited (ISARC)
  12. Edelweiss Asset Reconstruction Company Limited
  13. UV Asset Reconstruction Company Limited

In last year’s (2021) Budget, bad bank –National Asset Reconstruction Company Limited — is ready to commence operations with 15 cases worth Rs 50,335 crore to be transferred by March 31. A bad bank could deal with stressed assets and all regulatory permissions were granted.

What is a Bad Bank? Is it really “BAD”? How is it different from ARC’s?

Unlike ARC, bad banks are completely under government control. And the GOI has invested a huge portion for this program for economic development

Individual banks have to sell their stressed assets to ARCs and this process gets stuck because ARCs normally seek a steep discount on loans. The valuation comes as a problem. With the proposed bad bank being set up, the valuation issue is unlikely to come up since this is a government initiative.

Smaller ARCs don’t have the capacities to do cash deals with big accounts. So most bank get stuck in such situations, but in case of bad banks this is possible as they are under government 

For existing ARCs, bad banks have become a threat, bad loans getting aggregated on one entity. For long may cause a situation in future where the ARCs are able to negotiate deals with the bad banks.

This facility, being under government initiative, has a lot of profits, like they get some relaxations from the RBI when the new bad bank comes into operation. These relaxations will be related to the undertaking norms for banks on assets sold to an ARC and with respect to the requirement of 15 percent capital payment.

Taking all this into consideration this bad bank also has some flaws;

  • As they are under direct government control. The government will pay a high cost for stressed assets. So this doesn’t bring any profit.
  • There is always a tendency of bad crises because they are controlled by bureaucrats. and unlike private management these bureaucrats can offer the same commitment to the lenders.
  • Banks don’t address the elephant in the room which is the lack of focus on the quality of work.

CONCLUSION

We can conclude by saying that the government taking up an initiative for the financial upgrade of the country and people in the form of bad banks was not a bad idea after all but yes there are a lot of flaws which are ignored and continued. The thought was wise but people have to realise and work for the country. Now we know what an ARC is and how it is different from a bad bank and we know the pros and cons of such a facility.

faq

Frequently asked questions

Get answers to the most common queries related to the BANK Examination Preparation.

How do ARCs make money?

Ans: As they can negotiate deals with bad banks, they take bad loans at steep discounts and take special meas...Read full

Is a bad bank an ARC?

Ans: yes, a bad bank is an ARC owned mainly by the government.

Is ARC a NBFC?

Ans: Yes, ARC is an NBFC with RBI registration to carry out NBFC activities under section 45IA of the reserve...Read full

What is the full form of SARFAESI?

Ans: Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act....Read full

Why is a bad bank necessary?

Ans: when banks usually have high non-performing assets (NPA), a large part of profit goes in to cut the loss...Read full