ARCs were setup under the SARFAESI Act, 2002, to relieve banks and financial institutions of the burden of NPAs and allowing them to focus on their core activities. In the last few years, stressed assets of the Indian banking industry have risen alarmingly and is at a level of over 11 per cent of gross advances. However, ARCs which were created to combat this menace of growing NPAs, have not been effective in absorbing the accumulated stock and increasing flow. This has necessitated a review of the functional effectiveness of ARCs and measures are required to strengthen the institutional framework.
Even after 12 years of its existence, the ARC sector is still struggling to play an effective role. Aggregate networth of all 15 ARCs is just about Rs 3,400 crore, compared to the outstanding gross NPAs of the banking system at over Rs 3 lakh crore, which is nearly 100 times the combined net worth of all ARCs. If we take cognizance of the whole of stressed assets, including restructured assets, the presence of ARCs will look still more diminutive.
ARCs lack the capability to stand up to the challenge. Even in cases where they would like to acquire, there is a stalemate over NPA sales, because of the price expectation mismatch between banks and ARCs. Banks have time-based provisioning and, quite often, there is a disconnect between the underlying value of an asset and its book value. Public sector banks tend to play safe in having a 'provide and hold' approach to NPAs rather than sellling it at a lower price due to apprehensions of accountability for taking such a decision on a later date. For NPA resolution, debt aggregation is the key to sort out inter-creditor issues. However, due to lack of uniformity in asset classifications, variations in security and charge particulars, and differing price expectations in respect of assets across various banks, debt aggregation suffers and creates bottlenecks in NPA management.
Further, ARCs face considerable difficulty in transaction consummation because of widely-divergent stamp duty and registration charges from state to state, and procedures adopted at various places even within the same state. When assets are across multiple states, the problems get compounded.
Against the above backdrop, there is now an urgent need to address problems faced by ARCs and to empower them to play effective role in NPA management. Here are 10 steps for improving the functional effectiveness of the ARC sector.