What is Asset Reconstruction Company?

An Asset Reconstruction Company (ARC) is a financial institution that buys non-performing assets (NPAs) from banks and financial institutions. ARCs then try to recover the value of these assets by selling them to third parties or by restructuring the loans.

What are the objectives of ARCs?

The objectives of ARCs are to:

  • Help banks and financial institutions to clean up their balance sheets by removing NPAs.
  • Recover the value of NPAs for banks and financial institutions.
  • Provide liquidity to the market for NPAs.
  • Promote securitisation of financial assets.

How do ARCs work?

ARCs typically work in the following way:

  1. The ARC buys NPAs from banks and financial institutions at a discount.
  2. The ARC then tries to recover the value of these assets by selling them to third parties or by restructuring the loans.
  3. If the ARC is unable to recover the full value of the NPAs, it will write off the losses.

What are the benefits of ARCs?

The benefits of ARCs include:

  • They help banks and financial institutions to clean up their balance sheets.
  • They provide liquidity to the market for NPAs.
  • They promote securitisation of financial assets.
  • They can help to reduce the number of bad loans in the banking system.

What are the risks associated with ARCs?

The risks associated with ARCs include:

  • The ARC may not be able to recover the full value of the NPAs it buys.
  • The ARC may have to write off losses.
  • The ARC may be unable to sell the NPAs it buys to third parties.
  • The ARC may be unable to restructure the loans it buys.

MCQs on Asset Reconstruction Company (ARC)

  1. Which of the following is not an objective of ARCs?
    • Help banks and financial institutions to clean up their balance sheets by removing NPAs.
    • Recover the value of NPAs for banks and financial institutions.
    • Provide liquidity to the market for NPAs.
    • Promote securitisation of financial assets.
    • Regulate the banking sector.
    • The correct answer is (d). Regulating the banking sector is not an objective of ARCs.
  2. How do ARCs typically work?
    • The ARC buys NPAs from banks and financial institutions at a discount.
    • The ARC then tries to recover the value of these assets by selling them to third parties or by restructuring the loans.
    • If the ARC is unable to recover the full value of the NPAs, it will write off the losses.
    • All of the above.
    • The correct answer is (d). All of the above are correct.
  3. What are the benefits of ARCs?
    • They help banks and financial institutions to clean up their balance sheets.
    • They provide liquidity to the market for NPAs.
    • They promote securitisation of financial assets.
    • They can help to reduce the number of bad loans in the banking system.
    • All of the above.
    • The correct answer is (d). All of the above are correct.