Asset Reconstruction Company

Asset Reconstruction Company

Subject: Economy

Context: The much-awaited bad bank — National Asset Reconstruction Company Ltd (NARCL) has been incorporated, with the Corporate Affairs Ministry giving legal recognition few days back.

Concept:

• The setting up of an ARC along with an asset management company (AMC) (to be called India debt Management Company to take over the stressed debt of banks.
• The AMC will be controlled by the private sector and would help around the stressed assets for recovery.
• A bad bank is basically an entity that houses the bad loans (non-performing assets) of a bank and will resolve or liquidate bad debt (stressed debt) to recover
• Bad bank conveys the impression that it will function as a bank but has bad assets to start with.
• Technically, a bad bank is an Asset Reconstruction Company (ARC) or an Asset Management Company (AMC) that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
• The bad bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
• The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.

Previous Proposals:

• In May 2020 the banking sector, led by the Indian Banks’ Association, had submitted a proposal for setting up a bad bank to resolve the NPA problem, proposing equity contribution from the government and banks.
• In 2017 the Economic Survey suggested Public Sector Asset Rehabilitation Agency or PARA, to buy out the NPAs of high value from Indian banks.