By Siddharth Gokhale

Abstract:

This article examines the evolution, practice, and impact of India’s Asset Reconstruction Company (ARC) model—enacted under the SARFAESI Act, 2002—to address the country’s chronic Non-Performing Asset (NPA) crisis. Tracing the model’s origins in pre-1990s policy proposals through its formal establishment, it highlights how ARCs have shifted from their intended role of operational and managerial revival to prioritizing short-term recoveries via one-time settlements and liquidations. Against the backdrop of the Insolvency and Bankruptcy Code, 2016, the study critiques how settlement-driven strategies and protracted resolution timelines have undermined genuine asset reconstruction, misallocated capital, and perpetuated economic inefficiencies. It assesses recent regulatory measures—such as RBI curbs on one-time settlements—and argues for further reforms that incentivize long-horizon interventions, strengthen oversight, and integrate mandatory resolution frameworks to realign ARCs with broader economic stability and growth objectives.

Introduction: 

The Indian banking sector has, historically,faced regularly stressed asset crises, with Non-Performing Assets (NPAs) reaching alarming levels. The Asset Reconstruction Company (ARC) model, introduced under the SARFAESI Act 2002, aimed to reconstruct distressed assets and improve financial stability. Despite its potential, ARCs have prioritized short-term recoveries over genuine asset reconstruction. This article critiques the ARC model’s operational trends, its economic implications, and the need for regulatory reforms to align it with long-term economic goals.  

The Genesis of Indian Asset Reconstruction:

Global banking sectors have periodically grappled with NPAs. In India, NPAs surged post-1990s, peaking at 15.7% (17.8% for public sector banks) in 1996–97. Committees like the Tiwari Committee (1984) and Narasimham Committees (1990s) had highlighted systemic risks from NPAs. Initially, the Narasimham Committee I of 1991 had proposed an Asset Reconstruction Fund (ARF) to absorb bad debts via government-guaranteed bonds. However, the government’s deference in policy matters had been exercised in favour of costly bank recapitalization, estimated by the Narasimham Committee II of 1998 at ₹20,000 crore. Subsequent committees reimagined ARCs as specialized entities issuing NPA Swap Bonds. Finally, in 2002, the SARFAESI came into being, establishing the ARC model, enabling them to acquire NPAs and reconstruct them via operational, financial, or managerial interventions. It empowered ARCs to enforce security interests, convert debt to equity, and revitalize assets.  

From Reconstruction to Settlement:

ARCs were envisioned to transform distressed assets into viable entities. Yet, data reveals a preference for one-time settlements (OTS) and debt restructuring over reconstruction. In FY2021, ARCs prioritized liquidation over operational revival. Debt-to-equity conversions or managerial reforms remain rare.  

OTS involves partial repayments at discounts, offering immediate liquidity but ignoring underlying business viability. This approach merely postpones re-defaults, as unviable entities continue operations without restructuring. The Committee Reviewing ARCs (2025) noted that the methods employed “do not necessarily revive businesses.” Reconstruction demands expertise and time, which ARCs avoid due to resource constraints. Instead, quick recoveries dominate, undermining long-term economic revitalization.  

Recovery or Resolution:

The Insolvency and Bankruptcy Code (IBC) 2016 aimed to resolve stressed assets via time-bound processes. However, 25% of Corporate Insolvency Resolution Processes (CIRPs) end in pre-proceeding settlements, bypassing resolution objectives. Settlements prioritize creditor relief but perpetuate unviable businesses, causing resource misallocation. IBC timelines (330 days) are frequently violated, with resolutions averaging over a year. Prolonged processes erode asset value, discouraging ARCs from pursuing CIRP. Creditors face steep haircuts:14% on fair value and 69% on admitted claims,undermining the Code’s efficacy.  

The Economic Failure of ARCs:

ARCs were meant to bridge capital and distressed assets. However, their focus on OTS has stifled efficient capital allocation. Stressed assets remain unrevived, deterring investors and perpetuating economic inefficiency. Social costs—job losses, reduced output, and eroded investor confidence—compound these challenges in a resource-scarce economy like India. 

Conclusion:

ARCs, despite their potential, have failed to fulfill their mandate. The IBC’s shortcomings exacerbate systemic issues. Regulatory reforms must pivot ARCs toward reconstruction, not settlements. Recent RBI guidelines restricting OTS to exceptional cases are a positive step. Strengthening oversight, incentivizing reconstruction, and mandating resolution mechanisms are critical for long-term financial stability and economic growth.

About the Author: Siddharth Gokhale is a fourth-year law student from Jindal Global Law School and leads the Economics and Finance Cluster of Nickeled & Dimed. He is an avid reader of economics and is passionate about exploring the realm of international trade and investment law. He also has a keen interest in corporate restructuring, insolvency, and bankruptcy.

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