Setting up of Asset reconstruction companies (ARC) significantly reduce the problem of Non-Performing assets persisting in the Indian banking system. Elucidate (200 Words)
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K. V. A 5 years
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IAS Parliament 5 years
Good attempt. Keep Writing.
IAS Parliament 5 years
KEY POINTS
· The closing balance of NPAs of all scheduled commercial banks (SCBs), which was close to Rs 8 trillion in 2016-17, rose to Rs 10.4 trillion in 2017-18 according to Financial Stability Report by RBI
· The NPA problem of the banking sector is essentially a reflection of weaknesses of corporate sector balance sheets. Many corporates were hand-in-glove with their bankers, accumulating performing assets through the process of ever-greening year-after-year.
· To resolve this we need an Asset Reconstruction Company, which is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the latter can clean up their balance sheets.
· Bulk of the infrastructure loans can be securitised and sold to an asset reconstruction companies (ARCs) with appropriate haircut.
· Besides restructuring, the ARCs can perform certain other functions as well. They are permitted to act as a manager of collateral assets taken over by the lenders by receiving a fee. Similarly, they can also function as a receiver, if appointed by any Court or DRT.
· The ARCs get a vital role for asset restructuring under the new Insolvency and Bankruptcy Code. In 2016, the RBI has amended the SARFAESI Act to give make the ARCs more efficient.
· If private sector ARCs are not equipped to buy large infrastructure loans, the government may consider setting up an ARC in the public sector.
· Pressure on the government to recapitalise banks may be reduced if a public sector ARC is prepared to take over sticky advances of banks, particularly those lent to the infrastructure sector.
· Instead of transferring RBI’s excess capital to the government, this can be utilised for setting up of an ARC in the public sector, which can clean up the NPAs of PSBs.
