Asset reconstruction companies were recently mentioned in Budget 2021. They are also frequently mentioned in business as a mechanism to convert bad loans into profitable assets. In this post, we analyse the meaning and several dimensions of an asset reconstruction company.
As borrowers, when we take loans from a bank, our debt obligation becomes an asset for the bank. The routine instalment consists of interest payment and a sum towards the principal loan amount. There are situations where owing to financial stress, borrowers are unable to pay the amount due. Thus, the asset recorded in the bank’s balance sheet becomes ‘doubtful’.
When such loans remain unpaid for a longer time, they are called ‘non-performing assets. This reflects as a loss for the bank. This is where asset reconstruction comes into play. An asset reconstruction companies acquire the right of the bank or the financial institution to realize the value of such assets.
Asset Reconstruction Companies Mentioned in the 2021-22 Budget
Currently, the total stressed assets in the banking system are in excess of ₹15 lakh crores. Asset reconstruction companies are gaining traction because of their ability to take loans off the balance sheet of banks. This is likely to help banks perform better, while also taking away the bad loan on behalf of the individual borrower or the borrowing company. With the increasing need for loans in the post-pandemic recovery phase, this stress deters banks from freely lending.
The additional advantages include:
- Pooling of junk and doubtful assets under trained management adept at loan reconstruction
- Injecting liquidity into the system
- Isolates bad loans from the financial system to improve the overall outlook
- Freeing banks resources to help them focus on lending and credit generation
- Facilitates market development for stressed assets.
Who Regulates Asset Reconstruction Companies?
- Like all companies, the asset reconstruction company has to be incorporated under the Companies Act, 2013
- The legal genesis of the asset reconstruction company, as a concept comes under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
- Most institutions in the banking space – such as private banks, non-banking financial companies, payment banks, or small finance banks are additionally under the purview of the Reserve Bank of India. Asset reconstruction companies, being closely integrated with the lending aspect of banking are no exception – hence, the RBI also has the power to regulate it.
Capital and Other Requirements for Asset Reconstruction Company
As per the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – the following are the capital requirements:
- An asset reconstruction company should have a minimum of net owned funds of ₹100 crores or more
- A capital adequacy ratio (which refers to the proportion between the capital base and the risky assets) should be at least 15% of the risk-weighted assets
- Legal requirements for starting an asset reconstruction company also include registration with the RBI for this purpose.
How Does an Asset Reconstruction Company Perform?
Asset Acquisition
The asset reconstruction company acquires assets through auctions of non-performing assets of the banks. They can also engage in contracts with banks for such transfers.
Role of a Sponsor
A sponsor can acquire 10% or more of the Paid-up Capital of the asset reconstruction company.
Setting Up of a Trust
After the acquisition, the asset reconstruction company raises funds from qualified buyers, sponsors, etc., in exchange for security receipts. The company itself acts as the trustee of the fund.
Reconstruction of Loans
The company then uses its powers under the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 to recover dues from the borrower. It has broad powers of enforcing the collateral given by the borrower to recover the amount. Moreover, this includes the sale of any asset – immovable or movable given as a security while taking the loan.
Taking Over Management of the Borrower’s Business
If the defaulter is a company, partnership, legal association, or even a Sole Proprietorship Firm, an asset reconstruction company has legal powers to take over the management of the business. Additionally, this is an enabling provision by the RBI: https://www.rbi.org.in/, to help ensure better governance of the business.
You are no longer concerned with thinking of a firm name. MCA company Name Search can be used to generate a list of available businesses.Frequently Asked Questions
When can my secured assets be sold off by the asset reconstruction company?
If a borrower has failed to deposit the liability amount within a period of 60 days from the date of notice issued, the reconstruction company can take possession of the asset. Instead of an outright sale, it can prescribe one of the following - Change in management of the defaulting company Rescheduling payments, allowing additional time for repayment Converting a portion of the loan outstanding into shares Restructuring the interest amount.
What is the National Asset Reconstruction Company Ltd?
Recently, the government has transferred loans worth ₹89,000 crores to the National Asset Reconstruction Company Limited. This is envisaged as a bad bank that would manage assets that are no longer recoverable. This unique institution has been created to deal with large loans that exceed ₹500 crores and above.
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