Why in the news?

The RBI has introduced updated guidelines for Asset Reconstruction Companies (ARCs) through a master direction, effective from April 24, 2024.

What is an Asset Reconstruction Company (ARC)?

	Description
About	ARC is a special financial institution that acquires debtors from banks at a mutually agreed value and attempts to recover the debts or associated securities.
Regulation	ARCs are registered under the RBI. Regulated under the SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act).
Objective	ARCs take over a portion of the bank’s non-performing assets (NPAs) and engage in asset reconstruction or securitization, aiming to recover the debts.
Functions	Asset Reconstruction: Acquisition of bank loans or other credit facilities for realization. Securitization: Acquisition of financial assets by issuing security receipts.
Foreign Investment	100% FDI allowed in ARCs under the automatic route.
Limitiations	ARCs are prohibited from undertaking lending activities. They can only engage in securitization and reconstruction activities.
Working	Bank with NPA agrees to sell it to ARC at a mutually agreed value. ARC transfers assets to trusts under SARFAESI Act. Upfront payment made to bank, rest through Security Receipts. Recovery proceeds shared between ARC and bank.
Security Receipts	Issued to Qualified Institutional Buyers (QIBs) for raising funds to acquire financial assets.
Significance	Banks can clean up their balance sheets and focus on core banking activities. Provides a mechanism for resolution of NPAs and debt recovery.

1. - Minimum Capital Requirement Increase: ARCs are now mandated to maintain a minimum capital requirement of Rs 300 crore, a significant increase from the previous Rs 100 crore stipulation established on October 11, 2022.
  - Transition Period for Compliance: Existing ARCs are granted a transition period to reach the revised Net Owned Fund (NOF) threshold of Rs 300 crore by March 31, 2026.
  - Interim Requirement: However, by March 31, 2024, ARCs must possess a minimum capital of Rs 200 crore to comply with the new directives.

1. - ARCs failing to meet the prescribed capital thresholds will face supervisory action, potentially including restrictions on undertaking additional business until compliance is achieved.

- Empowerment of Well-Capitalized ARCs: ARCs with a minimum NOF of Rs 1000 crore are empowered to act as resolution applicants in distressed asset scenarios.
- Investment Opportunities: These ARCs are permitted to deploy funds in government securities, scheduled commercial bank deposits, and institutions like SIDBI and NABARD, subject to RBI specifications. Additionally, they can invest in short-term instruments such as money market mutual funds, certificates of deposit, and corporate bonds commercial papers.
- Investment Cap: Investments in short-term instruments are capped at 10% of the NOF to mitigate risk exposure.

[2018] With reference to the governance of public sector banking in India, consider the following statements:

Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.
To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(d) Neither 1 nor 2