Tuesday, May 01, 2007

ARC or debt collectors ?

The activities of Asset Reconstruction Companies (ARCs) finally seem to have picked up in India. Using the topicality of the subject, I had made an earlier post here. The pace of reforms in this billion $ industry was somehow slackening. To enthusiasts like me, it used to be more exciting to watch the paint dry or the grass grow. Ah, but then they do give some mild surprises like what I found in The Financial Express here.

I somehow keep asking myself this question. Our Banking system itself has been subjected to a fairly high level of oversight by both RBI and Finance Ministry. They have to maintain a 9% Capital Adequacy Ratio (CAR), SLR, CRR requirements imposed by RBI through its annual credit policy besides the regulations flowing from Banking Companies (Regulation) Act. Despite such elaborate supervision, Banks have managed to create a mountain of overdue loans or non-performing assets (“NPA”).

If it happens despite regulations, may be it’s time to relax them. Something similar is brewing in the US over Sarbanes Oxley Act, where there is a mounting pressure to loosen the strings by the Government. Otherwise ARCs merely end up being debt collection agents of the Banks rather than resuscitators of ailing businesses or turnaround artists. Vulture funds or Private Equity model should work fine, though with some brutal maneuvers deservedly on borrowers who dodged repayments, that led to the NPA creation in the first place.

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