Asset Reconstruction Company (ARC)
Asset Reconstruction Company (ARC): An Asset Reconstruction Company is an RBI-registered entity that buys non-performing loans from banks and NBFCs at a discount and works to recover them. The selling lender removes the exposure from its books, typically receiving cash and Security Receipts backed by future recoveries.
Why Asset Reconstruction Company (ARC) matters in credit and collections
- Regulated by the RBI under the SARFAESI Act.
- ARCs typically buy bad loans at a discounted price.
- ARCs have absolute powers to restructure the loan or enforce security interests without court intervention.
How an ARC transaction is structured
The lender assigns the debt together with the underlying security to the ARC, usually at a discount to outstanding dues. Consideration commonly combines an upfront cash component with Security Receipts, which are instruments representing a share in the eventual recovery from the acquired pool. The lender's return therefore has two parts: certain cash now, and uncertain upside if the ARC recovers well.
For the seller, the attraction is immediate: the NPA leaves the balance sheet, gross NPA falls, and management attention is freed. The trade-off is giving up recovery upside and accepting a haircut. Whether that is a good trade depends entirely on an honest internal estimate of what in-house recovery would realise, net of time, legal cost and management bandwidth.
ARCs are meaningfully regulated. RBI prescribes registration, minimum net owned funds, and a requirement that the ARC retain skin in the game by holding a minimum proportion of the Security Receipts it issues — a rule designed to align the ARC's incentives with recovery rather than fee income.
Regulatory basis
ARCs are registered under Section 3 of the SARFAESI Act, 2002 and regulated by the Reserve Bank of India, which sets minimum net owned fund requirements, Security Receipt retention norms and governance standards for the sector.
Source: Reserve Bank of IndiaHow lenders decide whether to sell to an ARC
- Build an honest in-house recovery estimate first, discounted for time and legal cost. Sell only if the ARC offer beats it.
- Consider portfolio sales for homogeneous small-ticket pools where individual legal action is uneconomic.
- Understand the Security Receipt structure — the cash-versus-SR split determines how much risk you have actually transferred.
- Do not use ARC sales as cosmetic GNPA management. It removes the exposure from the ratio without recovering the money.
- Confirm clean assignment of security and documentation, or the ARC's enforcement will stall on the file you handed over.
Asset Reconstruction Company (ARC) — frequently asked questions
What are Security Receipts?
Security Receipts are instruments issued by an ARC to the selling lender representing a beneficial interest in recoveries from the acquired loan pool. They are redeemed out of actual recoveries, so their eventual value depends on how well the ARC performs.
Does selling to an ARC improve reported asset quality?
It reduces gross NPA because the exposure leaves the books. Whether it improves genuine asset quality is a different question — the loss is crystallised in the haircut, and recovery upside is transferred to the ARC.