Reconstruction Companies Example For Free

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An effort to introduce changes in the financial sector in India was initiated way back in the 1970s. But it was only in 1991 after the report of the Narsimhan Committee on the Financial System was tabled, that the Government and the Reserve Bank of India introduced measures to develop a strong and efficient financial system. After the report by this Committee, even though regulations and norms in the financial sector were strengthened there was still an increase in the level of non-performing assets (NPAs) for banks and financial institutions. There were certain impediments faced by the banking and financial institutions which needed to be rectified, such as the high level of Non Performing Assets (NPAs). Areas such as securitisation and reconstruction lacked proper laws. A large proportion of NPAs would cause economic and financial degradation in the country. The SARFAESI Act was enacted in 2002 and it made provisions for the setting up of Asset Reconstruction Companies (ARCs) to address the problem of NPAs. This paper looks into the various aspects of the ARC’s and tries to weigh its pros against its cons.

Non-Performing ASSETS: The Problem

In India, any person desirous of doing business has been provided with a very ‘borrower-friendly’ environment as far as financial assistance for such businesses is concerned. While industry and trade have taken full advantage of such a conducive environment, they have not discharged their obligations. This has resulted in an alarming level on non-performing loans in the financial system. Every process or activity generates by-products during the process intended for certain core product or service. A by-product is thus a secondary or incidental product to the core process. Non Performing Loans (‘NPLs’), also known as Non Performing Assets (‘NPAs’), are a natural by-product of the business of lending. [1] Of course the efficiency of the overall intended process is inversely proportional to the quantum of the by-product, as a certain quantity of resources is consumed and embedded in such by-products. Banks and other financial institutions, being no different, also contract credit risks and generate NPAs. Not only do the NPAs deprive the bank of their income on account of its exposure, but also calls on for further investment in resources – financial, managerial, etc. The adverse impact to the bank’s profitability is further compounded on account of the provisioning requirements of the capital blocked in the NPLs. [2] Non-performing Assets pose a risk for the following reasons [3] : NPA’s not only create problems for the banking sector’s balance sheet on the asset side, but also create a negative impact on the income statement as a result of provisioning for loan losses. If banks become sanguine to the problem of loans going bad, they eventually encourage graft, slackness in credit underwriting and a complete lack of discipline. There is a drain on the system which affects the public at large. This happens either in terms of the banks being funded out of taxes or their resultant failure which further results in loss of savings for the people.

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