NARCL acquires first stressed account

Context

Recently, the National Asset Reconstruction Company Ltd (NARCL) acquired its first stressed asset — Jaypee Infratech — from lenders.

It acquired its exposure aggregating about Rs 9,200 crores at a 55 per cent haircut.

What is National Asset Reconstruction Company Ltd (NARCL)?

NARCL has been incorporated under the Companies Act and has applied to the Reserve Bank of India for a license as an Asset Reconstruction Company (ARC).
NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. PSBs will maintain 51% ownership in NARCL.
NARCL will house bad loan accounts of Rs.500 crores and above.
Establishing NARCL is part of the government’s efforts to clean up the financial system, which is sitting on one of the biggest piles of bad assets in the world.
It is expected that the warehousing of bad loans by NARCL will allow banks to cut losses and renew lending.

About Asset Reconstruction Company

An Asset Reconstruction Company (ARC) is a special type of financial institution that buys the debtors of the bank at a mutually agreed value and attempts to recover the debts or associated securities by itself.
The asset reconstruction companies or ARCs are registered under the RBI and regulated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002).
The ARCs take over a portion of the debts of the bank that qualify to be recognized as Non-Performing Assets.
Thus ARCs are engaged in the business of asset reconstruction or securitization or both.