Understanding the Working of Asset Reconstruction Companies
Non-Performing Assets or NPA are always a matter of concern for a growing economy. Right now the country is filled with such Non-Performing Assets that are stuck on with the banking systems. This gave rise to a need wherein such NPA’s could be cleared out to clean the balance sheet.
This need was one of the reasons why Asset Reconstruction Company (ARC) was created. Now, what does an ARC do? It basically takes the NPA’s or the so-called bad loans from the banks or financial institutes that are held up with it. This results in basically the banks and financial institutes getting rid of the bad loans from their respective balance sheets.
The advantage of doing so is that the banks and other financial institutes can then concentrate on their day to day production activities. This saves the banks time to follow up with the defaulters as the bad loans have already been sold off at a reasonable rate to the Asset Reconstruction Company.
The benefit of approaching ARC is that simply specialize in NPA and their primary focus is mitigating bad loans, making it as their core activity. The ARCs acquire bad loans from the financial institutions by bringing in potential investors. The two ways of ARCs acquiring assets are by raising funds and by a partnership model.
Qualified Institutional Buyers (QIB) can help the ARCs by providing their funds in order to make a down payment in order to purchase the NPAs. As NPAs are extremely risky investments, only QIBs are allowed to invest here in. In most cases, ARC directly does not buy the NPAs. Rather, ARCs services are requested by the banks to perform a debt recovery service. Owing to which, whatever profits do come from the NPA are then reasonably shared among the bank and ARC. This cumulates to a partnership model that works best in the interest of both parties.
JMFL is one such Asset Reconstruction Company in India who is based out of Mumbai. They have an independent branch that provides core and sole expertise in ARC. Their services have been steadfast grounded that helps in yielding maximum benefits out of an NPA and ensures minimum risks for investors alike.