Budget 2021: New Asset Reconstruction and Asset Management Company to be set up

The finance Minister of India, Nirmala Sitharaman, has announced during the presentation of the Union Budget 2021 that a new asset reconstruction and asset management company will be set up in India.

Key facts

  • The new Asset reconstruction and asset management company will look after the Non-Performing Assets (NPAs) of stressed banks.
  • New amendments will be incorporated so that the Asset reconstruction depositors can get easy and time-bound access to their savings.
  • This in turn will help depositors in banks that are currently under stress.
  • The government has also approved an increase in the cover from Rs 1 lakh to Rs 5 lakh for bank depositors.

What is Non-performing Asset?

The Non-Performing Asset are the asset for which any person delays the payment of the loan. It is the asset for which an amount is due on him by delayed payment.

Non-Performing Assets in India

The Indian Economy witnessed a huge growth during 2004 to 2009. This made the firms to take the bank loans very often. Huge investments were made in the infrastructure sector like powers, aviation, roads and steel. But the banks were lending these companies without analysing their financial health and credit ratings. This later increased the burden on the banks. Further, there were instances of banning of the mining projects and delay in environment permit. This increased the prices of the raw materials.  As a result, a huge demand and supply gap was created that affected the infrastructure companies. This in turn impacted the loan repaying capacity of the companies and resulted into Non-Performing Assets (NPA).

Asset Reconstruction Companies (ARCs)

In order to tackle the problem of NPA, Asset reconstruction Companies were set up. Asset Reconstruction Companies are the specialized financial institution that buys the NPAs or bad assets from banks and financial institutions. This help in clear the balance sheet of the companies. These companies were set up under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.  Under the norms, the banks were free to sell the bad assets to the ARCs rather than going after the defaulters.

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