What is an Asset Reconstruction Company (ARC)?
When banks accumulate too many bad loans — called Non-Performing Assets or NPAs — their balance sheets suffer and their ability to lend new money is impaired. Asset Reconstruction Companies (ARCs) exist to solve this problem. They are specialised financial institutions that buy bad loans from banks, often at a discount, and then work to recover those dues through various resolution strategies.
How ARCs Function: The Three-Step Process
First, ARCs acquire NPAs from banks at a discounted price. The bank gets to clean its balance sheet immediately, even if it takes a haircut on the loan. Second, once the ARC acquires an NPA, it employs resolution strategies: restructuring the repayment terms, negotiating a one-time settlement, enforcing security interest under SARFAESI, or in corporate cases, getting involved in management to revive the business. Third, the ARC aims to maximise recovery — any amount recovered above its acquisition cost is its profit.
Regulation and Legal Framework
ARCs in India are regulated by the Reserve Bank of India, which sets guidelines and oversees their operations. The primary legal framework under which they operate is the SARFAESI Act, 2002 — which gives ARCs the same legal power as banks to enforce security interests and recover dues without court intervention.
Why This Matters for SME Borrowers
If your loan has been sold to an ARC, you are now dealing with a different entity than your original bank. ARCs are often more flexible than banks in negotiating settlements — their business model depends on recovering more than they paid, and they have more room to negotiate than a bank constrained by regulatory provisioning requirements. Understanding this gives you negotiating leverage. SolveDet has experience negotiating with ARCs on behalf of SME borrowers.
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