ASSET RECONSTRUCTION COMPANY

AGENDA

• Origin and background of ARC•Formation of ARC•NPA’s Management•Approaches to Resolution•Foreign Investment in ARC•ARCIL and RARC•Laws and Regulations

ORIGIN OF ARCS

• Established under SARFAESI Act(The Securitization

• and Reconstruction of Financial Assets and• Enforcement of Security Interest Act, ) 2002.• Established to acquire, manage and recover

illiquid or• ‘Non-Performing’ Assets [NPAs] from Banks / FIs.• Recovery value with optimal costs through its• innovative NPA resolution methods

BACKGROUND OF ARC’S.

• Recommended by narsimham committee2 to clean up• balance sheets.• ARC is a company which is set up with the objective

of• taking over distressed assets (Non performing assets)• from banks or financial institutions .• to reconstruct or re-pack these assets to make those• assets saleable

Why there is need for ARCs inIndia???

• In India, level of non-performing assets with banks• and FIs alarmingly high due to:• Economic condition

Poor repayment environmentGovernment intervention in loan sanctionsLoan waivers

• • The Government of India has proactively taken steps• to clean up bad loans in the banking system

MEANING OF ARC

• Reconstruction company is a company formed for reconstruction

FORMATION OF ARC’S

• General guidelines are given inthe amendment of.

• • SARFAESI Act which is done in 2004.• ••Key requirements• 1.Issuing a certificate.• 2 . Director should have relevant

professional exp

PROCESS OF ACQUISTION

• Can acquire the financial assets of non performing

• asset companies on their own balance sheet.• Issue of bonds or debentures for

acquisition

NPACAUSES OF NPA FORMATION

• Poor Credit Appraisal System• • Lack of Proper monitoring of lending

portfolio•Lack of corporate culture•Non – Transparent accounting policy•Abolition ofLicense Raj

RESULT

• Credit Information Bureau (CIB)• • The Securitization and Reconstruction of

Financial• Assets and Enforcement of Security Interest• Act,2002.• • Asset Reconstruction Companies(ARC)

Role of ARC under SARFAESI Act,2002

• Improve the recovery and reduce NPA• •Acquisition of Interest

What will ARCs do?

• Purchase the non performing assets from banksand financial institutions at a discount as high as75 per cent of the original value of the loan.

NPAs can be assigned by banks and FIs. In turn these

• assets will be reconstructed /re- packed and thensold in the market in various forms or recoveredthrough securitization and reconstruction ofenforcement of security

Measures for Reconstruction specified u/s9(a) to (f) of the Ordinance

• Proper management of business of borrower.• •Sale or lease of a part or whole of business of• borrower.• •Rescheduling of payment of debts payable by• borrower.• •Settlement of dues payable by borrower.

•Taking possession of secured assets

Issues that deserve attention inestablishing ARCs

• Must have operational independence and sufficient

• authority.• •There should be some kind of fiscal incentives.

•Cost control occupies an important place.•There should be a mechanism to review the working

• of ARC

The problem of non-performingloans

• Owners do not receive a market return on their

• capital.• • Lower deposit rates and higher lending

rates•Misallocate credit from good projects•Which may lead to economic contraction

Approaches to Resolution:

• Bank-led approach (Creditor-led approach)• Vs• • The AMC approach

Advantages of an ARC approach

• Centralization of bad loans in one or a few hands

• Banks do not have to deal with problem clients

• Easier capital-market based funding for an ARC

Powers of ARC

• Possession•Management•Reduce the procedure[Short term]•Decision on Asset

Functions of ARC

• Act as an agent•Act as receiver•Act as manager Sec 13 (4) (c)•AS a service provider•ARC not to undertake function of securitization and

• no legal transfer of asset to its ownership, while• caring out the function

Methods for NPA

• Securitization•Asset reconstruction company•Exemption from registration of security receipt

RBI Guidelines

• Minimum owned fund of Rs.2 Crores (Sec-3)•Capital Adequacy ratio•Target•No account to be maintain for asset of(Trust)•Amount realization•May invest amount of owned funds in the security

• deposit issued by trust.

Foreign Investments in AssetReconstruction Companies

• Government decided to permit Foreign Direct• Investment (FDI) in equity capital.• • Foreign Investment Promotion Board (FIPB)

to• consider applications from persons/entities

eligible• to invest in India in equity capital

Conditions

• Maximum foreign equity shall not exceed 49% of the

• paid up capital.• • FDI alone will be permitted; investments by

FIIs will• not be permitted

International Scenario• In 1980s, U.S. used government sponsored ARC - Resolution• Trust Corporation (RTC) to overcome thrift crisis. RTC

acted as a "bad bank" and functioned as an effective salesmechanism for disposal of assets.

• •In the early 1990s Mexico and Sweden demonstrated• successful use of ARC mechanism.• •Korea used KAMCO as the nodal agency for acquiring and• disposing NPA’s.• •In Malaysia, Danaharta is the centralized ARC set up at the• instance of Government.• •Japan, China, Thailand and Indonesia have all used ARC• mechanism during the South-East Asian crisis

List of the name of ARC’s• Asset Reconstruction Company (India) Ltd, (ARCIL)

Assets Care Enterprise Ltd.,ASREC (India) Ltd,Pegasus Assets Reconstruction Pvt. Ltd.Dhir & Dhir Asset Reconstruction & Securitization

• Company Ltd• International Asset Reconstruction Company Pvt.• Ltd.(IARC)• Reliance Asset Reconstruction Company Ltd.• Pridhvi Asset Reconstruction and Securitization• Company Ltd.• •Phoenix ARC Pvt Ltd.• •Invent Assets Securitization & Reconstruction Private• Limited• •JM Financial Asset Reconstruction Company Limited• •India SME Asset Reconstruction Company Limited• (ISARC)• •Edelweiss Asset ReconstructionCompany Limited

ARCIL• First Asset Reconstruction Company to commence• business of resolution of NPAs .• In pursuance of Section 3 of the Securitisation Act• 2002, it holds a certificate of registration dated

August 29, 2003, issued by the Reserve Bank ofIndia (RBI) and operates under powers conferredunder the Securitisation Act, 2002.

• Arcil has recently launched a retail NPAs resolution• initiative through Arcil-Arms (a division of Arcil).• •Arcil was incorporated as a public limited company• on February 11, 2002 and obtained its certificate of• commencement of business on May 7, 2003.• •Assets under management over Rs. 8000 cr

Shareholdings of ARCILState Bank of India64,816,98019.95IDBI Bank Ltd.62,323,80019.18ICICI Bank Ltd.43,076,00013.26Punjab National Bank32,506,48610.01Lathe Investment Pte Ltd.132,164,8189.90Infrastructure Development FinanceCompany Ltd.27,197,7438.37First Rand Bank Ltd., South Africa13,358,6624.11Barclays Bank, plc9,733,5143.00Karnataka Bank Ltd.8,562,6002.64ICICI Home Finance Company Ltd.7,340,0002.26The Karur Vyasya Bank Ltd.6,380,0001.96Quiveo Enterprises Ltd.4,400,0001.35The South Indian Bank Ltd.4,139,3001.27Federal Bank Ltd.4,139,3001.27Others4,757,9371.47Total Shares Outstanding324,897,140100.00

Business ModelDeclaration of a trust for the benefit of the holders ofthe Security Receipts (SR) issued by the trust.••The sellers are typically a bank or a financialinstitution operating in India as defined under theSecuritisation Act, 2002.••NPLs are acquired by Arcil under a trust structure.They reconstruct by adopting various measures asprescribed under the Securitisation Act, 2002 torealize value from the underlying assets.••Portfolio of NPLs is prepared, the same should not bemodified during the process of sale having regardto the substantial efforts put in by the prospectivebuyers as well as the selling banks during theprocess.

Structured along the DRA model

• refer image

KEY DEVELOPMENTS FOR ASSETRECONSTRUCTION COMPANY (INDIA) LIMITED

• Plans to Raise INR 20,000 Million. Both domestic

• and foreign investors will contribute to the fund.

• ••To Acquire Stake In Southern Petrochemical• Industries Corp. Ltd(SPIC)

Who are benefited by RARC ?

• Lenders• ••Investors

••Asset Buyers••Service Providers

Challenges of ARC

• Sourcing funding from co-investors••Working out the acquisition price••Finding a way to speed up recovery process

Major factors in the successfulfunctioning of ARCs

• Ensuring participation of FIIs which would bring in• new money and providing tax-exempt status would• reduce the intermediation costs further.• • Banks/FIs need to accelerate the sale of NPAs to• ARCs, thereby converting their illiquid, capital-• consuming NPAs to cash• ARCs need to provide an early exit to the banks from• NPAs.• •Well functioning of ARCs differ from other• businesses.• •Quality of team and resources available with them.• •Ability to work with the legal system.