Note4Students
From UPSC perspective, the following things are important :
Prelims level: Asset Reconstruction Companies, SARFAESI Act, 2002;
Mains level: NA
Why in the News?
- After the allegations of ‘unethical practices’ by ARCs, including aiding defaulting promoters, the RBI intervened, with the Deputy Governor urging integrity and ethical conduct in their operations.
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The new guidelines laid out by the RBI:
- Enhanced Capital Requirements:
- 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.
- Supervisory Actions for Non-Compliance:
- ARCs failing to meet the prescribed capital thresholds will face supervisory action, potentially including restrictions on undertaking additional business until compliance is achieved.
- Expanded Role for Well-Capitalized ARCs:
- 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.
About 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 |
(Note: For reading more details on SARFAESI Act you can visit on our article named “RBI asks for SARFAESI Act Compliance” of Sept 2023) |
| 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 |
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| Foreign Investment | 100% FDI allowed in ARCs under the automatic route. |
| Limitiations |
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| Working |
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| Security Receipts | Issued to Qualified Institutional Buyers (QIBs) for raising funds to acquire financial assets. |
| Significance |
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PYQ:[2018] With reference to the governance of public sector banking in India, consider the following statements:
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 |
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