Hearing a PIL, SC held that there was a dire need to look into the functioning of ARCs (Asset Reconstruction Companies).
- The PIL alleged that debt of 1,537 crore rupee owed to public sector banks was settled through two ARCs for a mere 73 crore 50 lakh rupees showing misutilisation of public money.
About ARCs
- Meaning: Specialised financial institution to acquire financial assets (loans) of banks and financial institutions seeking to recover or re-construct them in an effort to combat the issue of non-performing assets in banking.
- Registered as a company under Section 3 of SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002.
- Regulation: Reserve Bank of India (RBI) has extensive regulatory control over ARCs
- Twenty-seven ARCs are currently registered with RBI.
Challenges associated with ARCs
- Low Recovery Rates: Due to litigation delays, valuation disputes, and borrower insolvency.
- Limited Restructuring Expertise: Determining the fair value of distressed assets is inherently complex and may result in disagreements.
- Delayed Process: Recovery proceedings often involve prolonged litigation before tribunals and courts, affecting the overall efficiency.
- Recovery Focussed: Activities of ARC have been mainly recovery-focused as opposed to revival-focused.
Ways to Reform ARCs
- Constitute a key advisory group with all stakeholders to review the functioning of ARC sector and suggest time-bound measures.
- Enhancing transparency in asset valuation and sale processes.
- Aligning incentives toward faster resolution rather than asset accumulation.
