ARCs are still at a nascent stage of development and market dynamics is likely to change with the entry of new players.
It has been observed that high levels of Non-Performing Assets (NPAs) in the banking system can adversely affect economy in many ways such as, financial crisis, under-utilization of the productive resources, and deteriorating the investment climate in the country. Many nations have started Asset Reconstruction Companies (ARCs) to solve the problem of bad loans only after experiencing a financial crisis. However, the Government of India has proactively taken steps to clean up bad loans in the banking system even before NPAs have become a burden on the financial system.
The primary objective of ARCs is rapid disposal of bad assets owned by banks to cleanup their balance sheets. With quick resolution process of NPAs, banks can concentrate on core business activities and other business opportunities. In 2004, Gross NPAs pegged at 90,000 crores, representing about 9% of the total advances, and net NPAs at 5% of the total advances. A large chunk of bad assets are from the industrial sector. Resolution of these assets would largely be through operation of the industrial assets over an extended time frame. These assets requires in-depth skills for operational and financial restructuring for the speedy resolution process. However, India is better positioned in comparison with its Asian peers. |
