"Asset Reconstruction" is defined as acquisition by a Company of any right or interest of a bank or financial institution in respect of a financial assistance for the purpose of realisation of such financial assistance". In short the company handles debt collection on behalf the banks and financial institutions.

In the normal course banks and financial institutions themselves handle the job of recovery for most of their lending, but in this process they are finally saddled with a left over portion of sticky debts representing willful dodgers and sunset industries. This is because no credit institution, on account of inherent risks in lending, can have 100% recovery performance. The left over or unrecovered credit represents difficult cases, which warrant special and concerted action. When such overdue credit outstanding grows large in volume, the banks and financial institutions are unable to divert attention from their core business substantially to this time-consuming job requiring concerted and continuous efforts. These can therefore be outsourced to specialised agencies i.e. Asset Reconstruction Companies, who have built-in professional expertise in this task, and who handle recovery as their core business.

Handling recovery of chronic cases and willful dodgers is the normal function of these companies and they are adequately geared and equipped for this job. In this respect the ARCs handle the function of recycling to productive and beneficial use of assets that otherwise threaten to turn as scrap or waste. In the first place Banks & FIs assign or transfer all their rights with reference to specific debts including their security rights on the collateral held by them as cover to the ARC. The ARC thus steps into the shoes of the banker and attends to recovery of the outstanding through manifold methods and devices.

The financial and banking sector in India during the past three decades has been continuously witnessing burden of sick industries, failed credit and bulging non-performing assets. This posed a recurring burden leading to poor capital adequacy and turning several banks weak and loss incurring. The Government of India consequently had to rush to their aid on several occasions during the past decade with doles of recapitalisation support to restore the sustainability of the ailing banking and financial institutions. This environment then should provide vast scope for ARCs to thrive with unlimited potential for a roaring business.

Despite this ARCs have not come through in large numbers and a few in the field have shown lackluster performance. The reason for this is not hard to find. The legal and economic environment in the country was not conducive for the growth and success of ARCs all these years. Whatever handicaps and bottlenecks are faced by the Banks also affect the ARC.

By way of a substitute professionals have come forward to offer consultancy services for the revival of sick industries for the benefit of the existing owners and banks too attempted for several years to "nurse" and revive such enterprises, categorised as "sick but viable" without significant results.

Sick industries in India are protected by the Industrial and Financial Reconstruction of sick industrial companies (special provisions) Act of 1985. BIFR (The Board for Industrial & Financial Reconstruction) was set up in terms of the act, as a quasi-judicial authority, to implement the provisions of the act.

"The Board was set up 'with a view to securing the timely detection of sick and potentially sick companies owning undertakings and to identify and implement speedy ameliorative remedial measures. Sadly, as with everything... , the provisions of SICA were misused. Clever corporates to ward off winding up petitions and other legal cases pending against them, registered themselves with BIFR, so as to take shelter under section 22 of SICA, which provided a protective umbrella against those cases during period of such registration."

(Source "Banking through the decades" by PSV Chari & PS Narasimhan published in "The Hindu Survey of Indian Industry 1999")

It was intended to be brake to curb sickness, but it served as a powerful engine to generate more NPAs. Rightly bankers now demand the abolition of BIFR as one of the remedial measures for arresting further growth of NPAs. In fact the recent Ordinance on Securitisation & Asset Reconstruction in effect has curbed the misuse of BIFR by Corporates, by way of providing for transfer of cases pending with BIFR at the choice of the creditor for action under the Ordinance.

Similarly many provisions of the law, relating recovery of money through civil suits, foreclosure of mortgages, bankruptcy and, liquidation etc. result more in favour of the willful defaulter to drag and delay action indefinitely and endlessly, than by way of providing quick and easy remedy to the aggrieved creditor.

The archaic legal system led to piling up of cases in judicial courts and consequently it resulted in enormous delay and time lag between the filing of a civil suit for recovery and securing and executing a decree (normally 5 to 10 years). Law in India is beneficial for the lawyers to thrive.

ARCs meant earlier (before the recent Ordinance) precious little given the state of bankruptcy and recovery procedures in India. It takes BIFR four years to decide on a case. Defaulters get permanent stays from creditors' claims under Section 22 of SICA. Recovery processes are fraught with delays. Debt Recovery Tribunals are overloaded with cases. Judges with little or no commercial competence grant adjournments as a matter of course. Liquidation takes at least 10 years - and that too with great luck. In India, the transfer price of NPAs will be determined by the payoffs from 'out-of-court' settlements. Those payoffs aren't very attractive.

This brings out the fact that ARCs in India were so far covered by the common law of the country and there was no special legislation to provide for their promotion, regulation and to enable them to carry on their function under a well-structured legal framework. Consequently there was no registration of these companies, with a central authority and no Registrar of ARCs to compile a database of such bodies in each State and disseminate needed information on them to the public on demand. For example if a private limited company claims that it is doing business for the past 15 years, it should have filed its annual return for the entire period with the Registrar of Companies of the State where the Company is registered and any member of the public for a nominal fee paid to the Registrar can inspect these statements and also obtain copies thereof if needed. Similar service in respect of ARCs was not available due to the absence of specific legislation dealing with ARCs.

The most important long-term measure in containing the growth of NPAs is radically altering the bankruptcy and recovery laws and procedures. Setting up asset reconstruction companies will mean precious little given the state of bankruptcy and recovery procedures in India. The legal framework is critically linked to the success of ARCs.

Similarly there was no regulatory authority, like SEBI, or RBI or IRDA or TRAI to regulate the functions of these companies and to ensure that they do not transgress business ethics and standards.

An organization can thrive when it is governed by a professional code with well-defined standards of structure and business norms, supported by the watchdog functions of an alert regulatory body. All these measures were absent in India, despite a rich potential for business opportunities for ARCs.

An ARC can do business only when it can possess an edge over the bank or financial institution, whose debts it takes over for recovery. The bank or financial institution will consider the comparative merits of in-house handling of recovery and outsourcing to the ARC and choose the latter option, only if it is attractive. ARCs have to possess better infrastructure, which in respect of a service institution means better personnel for the job. They need persons with diverse skills in engineering, valuation, banking, finance, law, marketing, etc. This presupposes that the ARC has to operate on a large scale and hire the best talented persons for the job. While taking over the assets from the secured creditor, the ARC has to make an initial payment. A purely Asset Reconstruction Company would need a huge capital base to sustain these operations.