What are Asset Reconstruction Companies

Background

Narasimham Committee in its first report had suggested formation of Asset Reconstruction Companies (ARC) with a view to clean the balance sheet of banks. ARC is a company which is set up with the objective of taking over distressed assets (Non performing assets) from banks or financial institutions and to reconstruct or re-pack these assets to make those assets saleable.

Why there is need for ARCs in India

In India the level of non-performing assets with banks and FIs is alarmingly high, which is the result of a number of factors including economic conditions, poor repayment environment, government intervention in loan sanctions and loan waivers, etc. To recover such assets, it is essential that services of some specialised centralised agency are available.

What will ARCs do

ARCs will purchase the non-performing assets from banks and financial institutions at a discount which will clear their balance sheets of sticky loans. NPAs can be assigned by banks and FIs. In turn these assets will be reconstructed /re-packed and then sold in the market in various forms or recovered through securitisation and reconstruction of enforcement of security.

What steps have been taken in India for formation of such companies

Recently the Government and RBI initiated the process of formation of such companies and for that purpose certain steps have been taken including enactment of Securitisation and Reconstruction of Financial Assets and Enforcement of security interest act 2002 and issuing of detailed draft guidelines by RBI.

Whether such companies have been incorporated in India

The Asset Reconstruction Company Limited, India is first ARC with an initial equity of Rs.10 crore with ICICI bank, IDBI and SBI to pick up 24.5% stake each(and remaining to be acquired by HDFC, IDBI Bank and UTI Bank).

For undertaking reconstruction, will they need registration with any regularity authority

Such companies will need registration with RBI before they take up any activity.

What are the advantages of formation of ARCs instead of recovery through Banks/FIs

The buying of impaired assets from banks or financial institutions by ARCs will make their balance sheets cleaner and they will be able to use their time, energy and funds for development of their business. ARCs may be able to mix up their assets (good and bad) in such a manner to make them saleable. There is possibility of securitisation resulting in funding of these assets through capital market instruments.

What is a Credit Information Company (CIC)?

A CIC collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to the CIC by banks and other Credit Institutions, on a monthly basis. This information is then used to create Credit Information Reports (credit report) which are provided to Credit Institutions in order to help evaluate and approve loan applications or any other credit applications.

If required by the loan provider, a CICs will also provide a Credit Score, which is a 3 digit numeric summary of your credit report. The CIBIL TransUnion Score is used my many lenders during the loan application process. CICs are also commonly referred to as “Credit Bureaus”.

The use of a credit report is best illustrated with an example. I have a home loan with Bank A and a credit card with Bank B. Both Bank A and B have submitted my personal information and payment details to the credit bureau (in this case it was CIBIL). Recently, I applied for an auto loan to Bank C.

Upon receiving my application, Bank C requested CIBIL for my credit report so that it could assess how I have been paying my current dues and whether I will be able to manage the additional burden of another EMI. While the bank also requested my Form 16, savings account statements and other identification documents, the credit report has become an often used tool in evaluating loan applications.

Greenfield investment

A greenfield investment is the investment in a manufacturing, office, or other physical company-related structure or group of structures in an area where no previous facilities exist.

Greenfield investing is usually offered as an alternative to another form of investment, such as mergers and acquisitions, joint ventures, or licensing agreements. Greenfield Investing is often mentioned in the context of Foreign Direct Investment

A related term to greenfield investment which is becoming popular is brownfield investment, where a site previously used for business purposes, such as a steel mill or an oil refinery, is expanded/upgraded to achieve superior return.

A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees.

Developing countries often offer prospective companies tax-breaks, subsidies and other types of incentives to set up greenfield investments. Governments often see that losing corporate tax revenue is a small price to pay if jobs are created and knowledge and technology is gained to boost the country's human capital.

Brown Field Investment

When a company or government entity purchases or leases existing production facilities to launch a new production activity. This is one strategy used in foreign-direct investment.