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Consider the following statements regarding Asset Reconstruction Company.
1. The asset reconstruction companies or ARCs are registered under the RBI.
2. SARFAESI Act, 2002 provides the legal basis for the setting up of ARCs in India.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'C'. Can you explain this answer?
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Most Upvoted Answer
Consider the following statements regarding Asset Reconstruction Comp...
The correct answer is Both 1 and 2.
In News
The RBI has set up a committee headed by Sudarshan Sen to undertake a comprehensive review of the working of asset reconstruction companies (ARCs) in the financial sector ecosystem and recommend suitable measures for enabling them to meet the growing requirements.
Key-Points
Terms of reference:
- To review the existing legal and regulatory framework applicable to ARCs and recommend measures to improve the efficacy of ARCs.
- To review the role of ARCs in the resolution of stressed assets, including under the Insolvency and Bankruptcy Code (IBC), and give suggestions for improving liquidity in and trading of security receipts.
What is an Asset Reconstruction Company (ARC)?
- It is a specialized financial institution that buys the Non-Performing Assets (NPAs) from banks and financial institutions so that they can clean up their balance sheets. This helps banks to concentrate on normal banking activities. Banks rather than going after the defaulters by wasting their time and effort can sell the bad assets to the ARCs at a mutually agreed value.
- The asset reconstruction companies or ARCs are registered under the RBI. Hence statement 1 is correct.
Legal Basis:
- The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up of ARCs in India. Hence statement 2 is correct.
- The SARFAESI Act helps the reconstruction of bad assets without the intervention of courts. Since then, a large number of ARCs were formed and were registered with the Reserve Bank of India (RBI) which has got the power to regulate the ARCs.
Capital Needs for ARCs:
- As per the amendment made in the SARFAESI Act in 2016, an ARC should have a minimum net owned fund of Rs. 2 crores.
- The RBI raised this amount to Rs. 100 crores in 2017. The ARCs also have to maintain a capital adequacy ratio of 15% of its risk-weighted assets.
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Community Answer
Consider the following statements regarding Asset Reconstruction Comp...
Asset Reconstruction Company (ARC)
Statement 1: The asset reconstruction companies or ARCs are registered under the RBI.
The first statement is correct. Asset Reconstruction Companies (ARCs) are registered under the Reserve Bank of India (RBI). ARCs were introduced in India to help banks and financial institutions deal with their non-performing assets (NPAs) and recover the maximum value from them.
Statement 2: SARFAESI Act, 2002 provides the legal basis for the setting up of ARCs in India.
The second statement is also correct. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up of ARCs in India. The Act empowers banks and financial institutions to take possession of collateral assets and sell them to recover their dues without the intervention of the court.
Explanation:
Asset Reconstruction Companies (ARCs)
- ARCs are specialized financial institutions registered under the RBI that are set up to acquire, manage, and resolve NPAs of banks and financial institutions.
- The primary objective of ARCs is to help banks and financial institutions clean up their balance sheets and recover the maximum value from their NPAs.
- ARCs acquire NPAs from banks and financial institutions at a discounted price and then work towards resolving them through various mechanisms such as debt restructuring, asset management, and sale of assets.
- These companies play a crucial role in the overall financial system by helping to reduce the burden of NPAs on banks, improving their financial health, and freeing up capital for lending to productive sectors of the economy.
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002
- The SARFAESI Act, 2002 was enacted to provide a legal framework for banks and financial institutions to deal with NPAs and enforce their security interest.
- The Act allows banks and financial institutions to take possession of collateral assets without the intervention of the court, thereby expediting the recovery process.
- It provides the power to banks and financial institutions to issue notices to defaulting borrowers, take possession of the secured assets, and sell them to recover their dues.
- The Act also provides for the establishment of ARCs and gives them the necessary powers to acquire and resolve NPAs.
Conclusion
Both the statements given in the question are correct. ARCs are registered under the RBI, and the SARFAESI Act, 2002 provides the legal basis for their establishment in India. These measures have been introduced to address the issue of NPAs and strengthen the financial system by improving the asset quality of banks and financial institutions.
Statement 1: The asset reconstruction companies or ARCs are registered under the RBI.
The first statement is correct. Asset Reconstruction Companies (ARCs) are registered under the Reserve Bank of India (RBI). ARCs were introduced in India to help banks and financial institutions deal with their non-performing assets (NPAs) and recover the maximum value from them.
Statement 2: SARFAESI Act, 2002 provides the legal basis for the setting up of ARCs in India.
The second statement is also correct. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up of ARCs in India. The Act empowers banks and financial institutions to take possession of collateral assets and sell them to recover their dues without the intervention of the court.
Explanation:
Asset Reconstruction Companies (ARCs)
- ARCs are specialized financial institutions registered under the RBI that are set up to acquire, manage, and resolve NPAs of banks and financial institutions.
- The primary objective of ARCs is to help banks and financial institutions clean up their balance sheets and recover the maximum value from their NPAs.
- ARCs acquire NPAs from banks and financial institutions at a discounted price and then work towards resolving them through various mechanisms such as debt restructuring, asset management, and sale of assets.
- These companies play a crucial role in the overall financial system by helping to reduce the burden of NPAs on banks, improving their financial health, and freeing up capital for lending to productive sectors of the economy.
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002
- The SARFAESI Act, 2002 was enacted to provide a legal framework for banks and financial institutions to deal with NPAs and enforce their security interest.
- The Act allows banks and financial institutions to take possession of collateral assets without the intervention of the court, thereby expediting the recovery process.
- It provides the power to banks and financial institutions to issue notices to defaulting borrowers, take possession of the secured assets, and sell them to recover their dues.
- The Act also provides for the establishment of ARCs and gives them the necessary powers to acquire and resolve NPAs.
Conclusion
Both the statements given in the question are correct. ARCs are registered under the RBI, and the SARFAESI Act, 2002 provides the legal basis for their establishment in India. These measures have been introduced to address the issue of NPAs and strengthen the financial system by improving the asset quality of banks and financial institutions.
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Consider the following statements regarding Asset Reconstruction Company.1. The asset reconstruction companies or ARCs are registered under the RBI.2. SARFAESI Act, 2002 provides the legal basis for the setting up of ARCs in India.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer?
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