SARFAESI Act and ARCs
- October 12, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
SARFAESI Act and ARCs
The Reserve Bank of India (RBI) has allowed asset reconstruction companies to act as resolution applicants under the Insolvency and Bankruptcy Code (IBC).
- ARCs can now operate as resolution applicants, which is not allowed under the SARFAESI Act.
- To qualify as an RA, the companies need to have a minimum net owned fund of ₹1000 crore and a board-approved policy to take up the role of an applicant.
- It should have a committee comprising a majority of independent directors for submitting resolution plans under the IBC
- The ARCs should also make additional disclosures in their financial statements on assets acquired under IBC.
- Non-complying ARC shall be subject to supervisory action, including prohibition on undertaking incremental business till it reaches the required minimum NOF
- RBI has also raised the minimum capital requirement for setting up ARCs to ₹300 crore from the existing ₹100 crore
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act of 2002
- The act was framed in order to address the problem of Non-Performing Assets (NPAs) or bad assets of banks/financial institutions through different mechanisms.
- It allows only secured creditors (lenders whose loans are backed by a security such as mortgage) to take possession over a collateral security if the debtor defaults in repayment.
- After giving a notice period of 60 days to the defaulting borrower, banks/financial institutions can:
- take possession of the pledged assets of the borrower,
- take over the management of such assets,
- appoint any person to manage them or
- ask debtors of the borrower to pay their dues too, with respect to the asset.
- The act provides procedure for registration and regulation of asset reconstruction companies (ARC) and allows them to carry out the business of :
- Asset reconstruction:
- It is the activity of converting a NPAs or bad assets into performing assets.
- The ARCs can acquire financial assets (NPAs) from banks and try to recover dues through measures such as:
- the proper management of the business of the borrower, by changing or taking over the management
- the sale or lease of a part or whole of the business
- rescheduling of payment of debts payable etc.
- It is the process of conversion of existing loans into marketable securities by ARCs through issue of security receipts.
- Creation of a Central Registry: by the Central Government for the purposes of registration of transaction of securitization and reconstruction of financial assets and creation of security interest.
- Application against measures to recover secured debts:
- can be filed by borrowers/lenders with Debt Recovery Tribunal (with appeal to Debts Recovery Appellate Tribunal) established under Recovery of Debts due to Banks and Financial Institutions Act, 1993.
- Provisions of this Act not applicable to:
- any security interest created in agricultural land
- any case in which the amount due is less than twenty percent of the principal amount and interest
- any security interest for securing repayment of any financial asset less than one lakh rupees.
- Thus, the Act provides three alternative methods for recovery of non-performing assets, namely:
- Securitisation-Securitization is the practice of pooling together various types of debt instruments (assets) such as mortgages and other consumer loans and selling them as bonds to investors.
- Asset Reconstruction-Asset reconstruction is the activity of converting a bad or non-performing asset into performing asset with the help of Asset reconstruction companies.
- Enforcement of Security without the intervention of the Court-If the borrower defaults, the bank may enforce security interests by:
- Take possession of the security;
- Sale or lease or assign the right over the security;
- Appoint Manager to manage the security;
- Ask any debtors of the borrower to pay any sum due to the borrower.
Asset reconstruction companies (ARCs)
- Asset reconstruction is defined as the acquisition of banks/financial institutions right or interest in any financial assistance by an ARC for realization of such financial assistance.
- ARCs or bad banks are the specialized agencies which facilitate bad loan resolution for banks by buying the debtors of the bank at a mutually agreed value and attempting to recover the debts or associated securities by itself; making its own profit by selling the loan at a price higher than what it paid to acquire the loan.
- In India, ARCs are incorporated under the Companies Act and registered with RBI under section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI), Act 2002.
- ARCs need to maintain a minimum NOF (Net Owned Fund) of Rs 100 crore (raised to 300 cr) and a capital adequacy ratio of 15% of its risk weighted assets.
- Asset Reconstruction Company (India) Ltd or Arcil, was the first ARC of India set up in 2002 by four banks SBI, ICICI Bank, PNB and IDBI Bank.
|SARFAESI vs IBC|