How Does An Asset Reconstruction Company Work?

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Every bank has a certain list of defaulters who are declared insolvent or bankrupt. Instead of wasting their time and effort in running after these defaulters, they sell off these accounts to the asset reconstruction companies. Asset reconstruction Companies are institutions that assist in converting the Non-Performing Assets into productive ones. A good asset reconstruction company in India buys NPAs at a fairly negotiable rate and enables the banks to clear off their losses in balance sheets.

Fund Raising by ARCs

ARCs issues bonds and debentures for raising funds to purchase the bad and non-performing assets. They also raise funds through security receipts. They give the right of these security receipts in the form of assets acquired by the Asset Reconstruction Companies In India to the Qualified Institutional Buyers as a security in exchange of the funds.

Benefits to the banks of getting associated with an Asset Reconstruction Company

Focus on day-to-day and developmental activities by Banks: Instead of wasting time, effort and money in recovering the bad assets, the energies are saved for smoother day-to-day activities and specific focus is laid on tapering new business opportunities.

Better Financial Health of the Banks: With the transfer of ownership of the NPA’s from Banks to ARCs, the banks can knock-off the liabilities and display a sound financial health through its balance sheets.

Issues faced by Asset Reconstruction Companies in India:

NPA Valuation: There is a lot of ambiguity around the valuation of NPA. Differences in Opinions are observed around the recovery period, data collection and valuation method.

Control Structure of ARCs: While the control of the structure of ARCs is with the private parties like the bank, there is lot of governmental regulation with a single party handling the ARC.

Lengthy Recovering Procedures: Indian Laws are known for its slow and lengthy procedures. Quickening the process and simplifying it further will encourage more parties to enter this business.

A firm like JM Financial focuses on eliminating these issues by realigning and restructuring the face of asset reconstruction companies in India. They use a scientific approach and an in-house team for pre-acquisition and acquisition of assets.

I am a MBA in finance, looking after the finances of my dad’s company. My long-term goal is to have my own start-up, for which I am devoting a lot of time in studying real-life case studies related to ESOP funding, IPO funding, real estate NBFC funding, and more. Writing is my passion through which I stay connected with the world.

 

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