‘ARCs lack capital, operational heft to revive stressed assets meaningfully’

Anita Shah, Joint Secretary at the Ministry of Corporate Affairs, has underscored the need for a calibrated strategy to address India’s mounting bad loan problem, weighing the roles of the Insolvency and Bankruptcy Code (IBC) and Asset Reconstruction Companies (ARCs) while cautioning against overreliance on sovereign guarantees. In a detailed analysis on social media platform LinkedIn, Shah highlighted the strengths and limitations of both mechanisms.

The IBC, introduced in 2016, has brought transparency and speed to insolvency resolutions but faces challenges like judicial delays and suboptimal recoveries. “While the IBC’s time-bound, creditor-driven model is revolutionary, procedural bottlenecks and frequent amendments have diluted its efficacy,” she noted. Creditors, she pointed out, often recover less than 40% of claims.

On ARCs, Shah acknowledged their legacy role in absorbing non-performing assets (NPAs) but critiqued their limited success due to funding constraints and a narrow focus on recovery rather than resolution. “ARCs, though useful for balance-sheet cleanup, lack the capital and operational heft to revive stressed assets meaningfully,” she observed. However, she hinted at a potential revival with government-backed initiatives like the National Asset Reconstruction Company Limited (NARCL or “bad bank”).

Sovereign Guarantees: A Double-Edged Sword

Shah reserved sharp criticism for the pervasive use of sovereign guarantees on bad loans, warning of moral hazards and fiscal risks. “Blanket guarantees encourage reckless lending, distort market discipline, and shift the burden to taxpayers,” she wrote, advocating for targeted interventions instead.

The Way Forward

Shah called for a multi-pronged approach:

1. Strengthening IBC: Faster adjudication, reduced judicial backlog, and stricter enforcement.
2. Reforming ARCs: Infusing capital and expanding their mandate beyond recovery to include revival.
3. Curbing Guarantees: Limiting sovereign backstops to exceptional cases to preserve fiscal health.

Her remarks come amid rising NPAs in public sector banks and renewed debates on India’s resolution framework. Experts say her analysis aligns with global best practices but stress the need for political will to implement reforms.

“A well-calibrated ecosystem—combining legal, financial, and regulatory fixes—is key to sustainable NPA resolution,” Shah concluded.

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