Asset Reconstruction Corporations (ARCs) – Believers IAS Academy

Asset Reconstruction Corporations (ARCs)

Why in information?

Lately, SEBI allowed all Non-Banking Monetary Corporations (NBFCs) to spend money on safety receipts (SRs) issued by Asset Reconstruction Corporations (ARCs).

• SEBI additionally allowed Housing Finance Corporations (HFCs) to spend money on them.
• This transfer goals to boost participation within the harassed asset market and enhance liquidity.

Relevance:
GS-03 (Economic system)

What are safety receipts?

• Safety Receipts (SRs) are monetary devices issued by Asset Reconstruction Corporations (ARCs).
• ARCs situation these safety receipts to buyers once they purchase Non-Performing Belongings (NPAs) or unhealthy loans from banks and monetary establishments.
• These receipts characterize the holder’s share within the underlying distressed belongings and are redeemed when the ARC recovers the cash from the borrower.

How do safety receipts work?

• Buying of NPAs: At first the ARCs buy NPAs from banks after an agreed-upon haircut (low cost on mortgage worth).
• Issuance of SRs: As an alternative of paying the complete quantity upfront, ARCs situation Safety Receipts (SRs) to buyers, together with banks, monetary establishments, and now NBFCs.
• Mortgage Restoration Course of: ARCs work to get better dues from defaulters via restructuring, settlement, or authorized motion.
• SR Redemption: Buyers obtain returns primarily based on the quantity recovered from distressed belongings.

Benefits of the Transfer

• Elevated Investor Participation: Expands the pool of certified consumers, enabling NBFCs to amass safety receipts and boosting market depth.
• Higher Liquidity for ARCs: Enhances liquidity within the distressed asset market, permitting ARCs to effectively handle and resolve unhealthy loans.
• Improved Monetary Stability: strengthens the monetary ecosystem by enabling extra establishments to take part in asset decision, decreasing banking sector stress.
• Encouraging Credit score Progress: With higher liquidity and asset decision, monetary establishments can prolong extra credit score, supporting financial development.

Prelims Query:

Think about the next statements:

1. Asset Reconstruction Corporations (ARCs) are registered with RBI for the aim of changing illiquid belongings into liquid belongings.
2. They’re regulated by the Ministry of Finance.
3. “Unhealthy financial institution” and “ARC” (Asset Reconstruction Firm) are primarily the identical factor.

Which of the statements given above is/are appropriate?

(a) 1 and three

(b) 2 and three

(c) 1 and a pair of

(d)1, 2, and three.

Reply:  (a) 1 and three