Asset reconstruction companies: India lacks thinking or reasoning

ARCIL, the first asset reconstruction company in India, started its operations in financial year 2003-4. As on date there are more than a dozen asset reconstruction companies registered with the Reserve Bank of India and most of them seem to have commenced operations. The Indian model of asset reconstruction companies differs substantially from the global model of companies formed to resolve systemically impaired loans. Briefly, the chief differences are:

Globally, asset management companies were formed to resolve loans that went bad because of a systemic crisis, not loans that went bad because of bad lending. In India, there is no finding that the loans that have gone bad in the past have suffered a systemic crisis. In fact, there is no evidence of a systemic or market crisis in India at all. Hence, the approach has had nothing to do with managing the evils of a system breakdown.
India is the only country where ARCs have sprung up as a business model, with special statutory powers granted by the lawmakers. There is no doubt that dealing with distressed assets is a global business, but in no other case have governments come forward to grant special incentives or special legal powers to profit-oriented asset management companies. In other words, where special powers were granted, as in case of Danaharta, Malaysia, the vehicle a singular brief – resolution of loans that went due to a system crisis. It is arguable whether asset reconstruction companies, which were envisaged as tool of resolving the problem of bad loans, could actually be a business model, and if it is a business model indeed, is there any justification for granting special statutory powers to them.
India is the only country where asset reconstruction companies do not have a sunset clause. In most other countries, such as USA, Malaysia, etc., asset management companies came in response to a crisis. Crisis resolution measures cannot be everlasting – they lose their meaning if they last forever.

Clearly, there has been no central thinking on the role and powers of ARCs. The Committee reports on whose recommendations the ARC model was initially mooted may have actually never envisaged an asset reconstruction business boom that India currently seems to have.