A bank that holds a large bad loan has three choices. It can chase the borrower itself, through the courts, the SARFAESI Act or the Insolvency and Bankruptcy Code (IBC). It can write the loan off and keep trying to recover it. Or it can sell the loan to a specialist buyer and move on. In India that buyer is an asset reconstruction company (ARC): a company registered with the RBI under the SARFAESI Act, 2002, which buys bad loans at a discount, pays mostly in security receipts (SRs) rather than cash, and earns its money by recovering more than it paid. A bad bank is the same idea at state scale. India's bad bank, the National Asset Reconstruction Company Ltd (NARCL), was set up in 2021 to take over large legacy NPAs, with a government guarantee of ₹30,600 crore behind its SRs. This part explains how ARCs work, the 15:85 structure, the rules the RBI has tightened since 2022, NARCL's record up to 2026, and the lessons from the world's best-known bad banks.
This part assumes you know how NPAs are recognised and provided for (Part 25) and how the IBC works (Part 26). The 2015–2018 NPA crisis and the clean-up that followed are covered in Part 15, and the RBI's wider supervisory toolkit in Part 18.
In the news
- 11 September 2026: RBI publishes FAQs on ARCs. The FAQs, based on the ARC Directions of 28 November 2025, confirm that ARCs are not a class of NBFC, that an ARC needs a net owned fund of ₹1,000 crore to act as a resolution applicant under the IBC, and that the maximum realisation period is eight years from acquisition. Why it matters for the exam: the ₹300 crore and ₹1,000 crore NOF thresholds and the five-to-eight-year realisation limit are standard facts.
- 31 July 2026: Supervisory returns directions for ARCs. The RBI issued the ARC Supervisory Returns Directions, 2026, effective immediately, requiring quarterly returns on key financial parameters (DNBS07) and overseas investments (DNBS13) and a yearly auditor certificate (DNBS10). Why it matters for the exam: ARCs are regulated and supervised by the RBI under the SARFAESI Act, not under the NBFC rules.
- 23 June 2026: NARCL to look beyond its guarantee. The Economic Times reported that NARCL is preparing to buy smaller stressed accounts (debt below ₹500 crore) outside the sovereign guarantee framework, and that nearly ₹22,000 crore of the ₹30,600 crore guarantee has been used. Why it matters for the exam: NARCL was designed for large accounts of ₹500 crore and above with guaranteed SRs; this would be a shift in its model.
- June 2026: Fifth full exit for NARCL. NARCL recovered over ₹575 crore from the resolution of Agson Global, an aroma-ingredients company, fully redeeming the SRs held by lenders and distributing nearly ₹200 crore extra. Why it matters for the exam: full redemption plus an "upside" distribution is what a successful SR looks like.
- 10 June 2026: Draft Second Amendment Directions for ARCs. The RBI invited comments until 9 July 2026 on draft rules that harmonise the compliance and internal audit functions of ARCs. Why it matters for the exam: it shows the RBI applying bank-style governance to ARCs, a theme since 2022.
- 30 April 2026: NARCL recovers ₹4,364 crore in 2025-26. The Finance Ministry said NARCL's recoveries in 2025-26 were about 70% of its cumulative total of ₹6,345 crore from 23 accounts, and that by March 2026 it had acquired 33 borrower entities with debt of ₹1,65,862 crore. Why it matters for the exam: these are the latest official numbers on India's bad bank.
- 31 March 2026: ₹300 crore NOF deadline; recovery rates rise. Existing ARCs had to reach the ₹300 crore minimum net owned fund by 31 March 2026, the end of the glide path set in October 2022. The same day Crisil Ratings estimated the cumulative recovery rate on the SRs it rates at about 85% in 2025-26, rising to about 90% in 2026-27. Why it matters for the exam: the NOF went from ₹2 crore to ₹100 crore to ₹300 crore; know the dates.
- 10 March 2026: Owned-fund amendment. The RBI let ARCs count quarterly profits in free reserves for computing owned funds, subject to a limited review by auditors and a deduction for average dividends. Why it matters for the exam: it eased the capital squeeze just before the ₹300 crore deadline.
What an ARC is
The law: SARFAESI Act, 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 did two things. It let banks and financial institutions enforce security without going to court: once a secured loan is an NPA, the lender can send a demand notice and, if the borrower does not pay within 60 days, take possession of the collateral and sell it (Section 13). And it created a legal framework for securitisation companies and reconstruction companies, now called ARCs, which must be registered with the RBI under Section 3 and are regulated by it. The Supreme Court upheld the Act in Mardia Chemicals v. Union of India (8 April 2004), adding that a borrower can appeal to the Debt Recovery Tribunal.
The enforcement route does not apply to unsecured loans, to loans below ₹1 lakh, or where the amount outstanding is less than 20% of the principal and interest. Since 2021, NBFCs with assets of ₹100 crore or more can use it for loans of ₹20 lakh and above. The first ARC, Asset Reconstruction Company (India) Ltd (ARCIL), was set up under the Act; by 2021 there were about 28 ARCs.
What ARCs may do
ARCs are not NBFCs. They cannot take deposits or lend for ordinary business. Their permitted activities are securitisation and asset reconstruction, plus functions listed in Section 10 of the Act and anything the RBI specifically allows. To recover a loan they may:
- enforce the security interest (take possession of and sell the collateral);
- reschedule the debt or settle dues with the borrower;
- change or take over the management of the borrower's business;
- convert part of the debt into equity;
- act as a resolution applicant under the IBC, but only if their NOF is at least ₹1,000 crore.
The sale or lease of a borrower's business is also in the Act, but the RBI has not yet issued guidelines that would let ARCs use it.
Who regulates what
| Question | Answer |
|---|---|
| Law | SARFAESI Act, 2002 |
| Registration | RBI, Section 3 of the Act; business must start within six months of registration (extendable to twelve) |
| Current rules | RBI (Asset Reconstruction Companies) Directions, 2025, issued 28 November 2025, and their 2026 amendments |
| Minimum NOF | ₹300 crore (existing ARCs by 31 March 2026) |
| NOF for IBC resolution applicant | ₹1,000 crore |
| Are ARCs NBFCs? | No; they are a separate category |
How an ARC deal works
Step by step
- The bank decides to sell. Under the RBI's 2021 rules on the transfer of loan exposures, banks can sell stressed loans to ARCs, usually through an auction. An ARC cannot buy bilaterally from its own sponsor or group, only through a transparent, arm's-length auction.
- Price discovery. ARCs bid. The price is usually well below the loan's book value, because recovery is slow and uncertain. The winning bid becomes the acquisition price.
- A trust is formed. The ARC sets up a trust for each acquisition (or pool) and acts as its trustee. The loan is transferred to the trust.
- Security receipts are issued. The trust pays for the loan by issuing SRs to qualified buyers (QBs): banks, financial institutions, insurers, mutual funds and other institutional investors permitted by the rules. Usually the selling bank takes most of the SRs, and the ARC takes the rest, paying cash for its share.
- Recovery. The ARC has a planning period of up to six months to fix a recovery strategy, and must realise the asset within five years, extendable by its board to eight years in all.
- The waterfall. Recoveries pay expenses and the ARC's management fee, then redeem the SRs. Any surplus above face value is upside, shared among SR holders.
Security receipts
An SR is defined in Section 2(1)(zg) of the SARFAESI Act as a receipt issued by an ARC to a qualified buyer, showing an undivided interest in the financial asset being reconstructed. Three features matter for exams:
- It is not a promise to pay. An SR pays only what the underlying loan recovers. If recovery is less than the SR's face value, the holder loses the difference.
- It must be rated. Since October 2022 every SR must carry a recovery rating from a credit rating agency, and the ARC must declare a net asset value (NAV) based on it. Banks value their SRs at this NAV.
- Upside comes last. The ARC can book yield or upside only after the SR principal is fully redeemed, and no class of SRs may get priority over another before all are redeemed.
Why ARCs must keep "skin in the game"
If the bank took 100% of the SRs, the ARC would carry no risk and would earn only a management fee, so it would have little reason to recover hard. The RBI therefore makes ARCs invest their own money. Under the current rule, an ARC must hold, in every class of SRs under every scheme and until all are redeemed, the higher of:
- 15% of the transferor's (selling bank's) investment in the SRs, or
- 2.5% of the total SRs issued.
Until October 2022 the minimum was a flat 15% of SRs. The new formula still means 15% when the bank keeps most SRs, but falls towards 2.5% when the ARC pays the bank almost entirely in cash and the bank keeps few or no SRs. The change rewards cash deals, which give banks a clean exit. According to Crisil, cash-based transactions made up 36% of the SRs it rated by February 2022, up from 4–5% in February 2017.
The ARC's management fee must be linked to performance and actual recoveries, and is recovered only from the underlying assets. Clauses that pay a fee regardless of recovery are not allowed.
The 15:85 structure
"15:85" means the seller gets 15% of the agreed price in cash and 85% in SRs. In a private ARC deal, the 15% cash is usually the ARC's own payment for its 15% share of the SRs; the other 85% of SRs go to the bank.
The structure explains both why ARCs grew and why they were criticised. It let ARCs buy large loan books with little capital: a ₹1,000 crore portfolio bought at ₹300 crore needs only ₹45 crore of ARC cash. But it also left 85% of the risk with the bank, so the "sale" often moved a bad loan from one line of the balance sheet (loans) to another (investments in SRs). RBI rules force banks to provide on SRs whose recoveries lag, which limits how much a bank can hide in this way.
The rule changes of 2022
In April 2021 the RBI set up a six-member committee, chaired by a former Executive Director, to review ARCs comprehensively. It reported in September 2021. On 11 October 2022 the RBI issued a revised framework based on part of its report:
| Area | Change |
|---|---|
| Capital | Minimum NOF raised from ₹100 crore to ₹300 crore; existing ARCs to reach ₹200 crore by 31 March 2024 and ₹300 crore by 31 March 2026 |
| SR investment | Higher of 15% of transferor's SRs or 2.5% of total SRs (was 15% of SRs) |
| IBC | ARCs with NOF of at least ₹1,000 crore may be resolution applicants under the IBC |
| Settlements | Settlement with a borrower needs a board-approved policy; for accounts above ₹1 crore an Independent Advisory Committee must examine it |
| Governance | Rules on board composition, independent directors, audit and nomination committees |
| Disclosure | Track record of SR returns and recovery ratings must be published |
| Ownership | Prior RBI approval for large changes in shareholding or sponsors |
| Surplus funds | May be invested in short-term instruments, up to 10% of NOF in some cases |
The NOF requirement has risen in steps: ₹2 crore until 2016, ₹100 crore from 2017 after the 2016 amendment to the SARFAESI Act, and ₹300 crore now. Crisil noted in October 2022 that more than half of all ARCs had NOF below ₹300 crore, so the new floor was expected to force mergers and exits. The rules were consolidated, first in a Master Direction of 24 April 2024 and then in the ARC Directions, 2025 of 28 November 2025.
Two other rules are worth knowing. ARCs may not restructure accounts classified as fraud or wilful default unless the promoters are replaced and the borrower is fully separated from them. And a borrower's dues cannot be settled by the same officials who handled its acquisition.
The size of the industry
The ARC industry is small next to the banking system and has been shrinking since 2023, as banks have fewer bad loans to sell and recover more through the IBC.
- Private ARCs' assets under management (measured as SRs outstanding, excluding NARCL) fell about 15% in 2024-25, including a one-time technical write-off of ₹13,000 crore by one large ARC; without it the fall was about 5%. Crisil expected a further fall of 4–6% in 2025-26 to about ₹1.05 lakh crore.
- New acquisitions by private ARCs, measured by SRs issued, fell about 29% from about ₹31,000 crore in 2023-24 to about ₹22,000 crore in 2024-25, while redemptions (over ₹28,600 crore) exceeded acquisitions for the second year running.
- Recoveries are improving. Crisil estimates the cumulative recovery rate on the SRs it rates at about 85% in 2025-26 and about 90% in 2026-27. Real estate is expected to give 40–45% of recoveries, and corporate assets about 92% of the total.
The reasons are clear. The banking system's gross NPA ratio was down to 1.8% in March 2026, so there is less to buy. NARCL now takes the biggest legacy accounts. And the IBC competes directly: in 2024-25 banks recovered about 37% of the amounts involved in IBC cases, against 31.5% under SARFAESI, according to the RBI's Report on Trend and Progress of Banking in India 2024-25. ARCs have responded by buying more retail pools and by acting as resolution applicants under the IBC.
India's bad bank: NARCL and IDRCL
Why a bad bank?
After the RBI's Asset Quality Review of 2015–16, bank NPAs peaked at about 11.6% of advances in March 2018 (Part 15). Much of the stock was in a few very large accounts in power, steel, infrastructure and real estate, each owed to many banks. Private ARCs could not afford to buy them, and banks were reluctant to sell at deep discounts. A government-backed buyer could aggregate these loans, pay a fair price and work them out without the coordination problem among dozens of lenders.
The two-company design
The Union Budget 2021-22 (1 February 2021) announced the plan. It uses two companies:
| NARCL | IDRCL | |
|---|---|---|
| Full name | National Asset Reconstruction Company Ltd | India Debt Resolution Company Ltd |
| Role | Buys and holds the stressed loans (aggregator) | Manages and resolves them, using market professionals and turnaround experts |
| Ownership | Public sector banks hold 51% | PSBs and public FIs hold at most 49%; private lenders the rest |
| Regulation | RBI-registered ARC | Service company |
NARCL was incorporated on 7 July 2021 and received its RBI certificate of registration as an ARC on 4 October 2021.
The deal terms
- Target: about ₹2 lakh crore of stressed loans, in phases. The first phase was to be about ₹90,000 crore of fully provisioned assets.
- Account size: loans of ₹500 crore and above.
- Payment: 15% in cash, 85% in SRs.
- Guarantee: On 15 September 2021 the Cabinet approved, and on 16 September the Finance Minister announced, a central government guarantee of up to ₹30,600 crore on NARCL's SRs, valid for five years. It covers the shortfall between the face value of an SR and the actual amount realised, and can be invoked only on resolution or liquidation. NARCL pays a guarantee fee that rises over time, to discourage delay.
The guarantee makes NARCL's SRs much safer than a private ARC's, which reduces the provisions banks need against them and makes banks more willing to sell. The fee and the five-year limit push NARCL to resolve quickly.
The record so far
NARCL started slowly. Banks and NARCL argued over prices, and several early accounts were contested. By its own and the Finance Ministry's accounts it has since picked up pace:
| Measure | Value | Date |
|---|---|---|
| Borrower entities acquired | 33 | March 2026 |
| Debt acquired (aggregate exposure) | ₹1,65,862 crore, about 83% of the ₹2 lakh crore target | March 2026 |
| Recoveries in 2025-26 | ₹4,364 crore (about 70% of the cumulative total) | 2025-26 |
| Cumulative recoveries | ₹6,345 crore from 23 accounts, over 48% of acquisition cost | March 2026 |
| Fully resolved accounts | 3, at 148%, 115% and 183% of acquisition cost (a fifth full exit, Agson Global, followed in June 2026) | 2026 |
| Guarantee used | Nearly ₹22,000 crore of ₹30,600 crore (press report) | June 2026 |
NARCL has also bid in IBC processes. In January 2023, for example, it emerged as the top bidder for the two SREI group finance companies with a net present value offer of ₹5,555 crore.
What comes next
Two changes were reported in 2026, neither yet confirmed by an official notification at the time of writing. In March 2026 the Economic Times reported a government plan to merge NARCL and IDRCL, to end the duplication of costs and decisions in the two-company structure. In June 2026 it reported that NARCL would start buying smaller accounts outside the guarantee, possibly with cash bids. The guarantee approved in September 2021 for five years is due to run out around now; check the news for any extension before the exam.
Bad banks around the world
India is not the first country to try a bad bank. The best-known examples share a pattern: a crisis leaves banks with too many bad loans, the state creates a temporary agency to buy them, and the agency is judged by how fast and how fully it sells them.
United States: Resolution Trust Corporation (1989–1995)
The RTC was created by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), 1989 to deal with the savings and loan (thrift) crisis. It closed or resolved 747 thrifts with total assets of about $394 billion, sold their assets, and was itself closed on 31 December 1995, when its duties passed to the FDIC. The ultimate cost to taxpayers was estimated at up to $124 billion. The RTC is the model of a bad bank with a fixed sunset date and a mandate to sell quickly.
Sweden: Securum (1992–1997)
During Sweden's banking crisis of the early 1990s, the state took over the partly state-owned Nordbanken and moved its bad loans into Securum in 1992: roughly a quarter of the bank's credit book, about 3,000 loans to 1,274 companies. The state put in 24 billion kronor of share capital. Securum took control of borrowers' assets, especially property, restructured them and sold them, including through stock-market listings such as Castellum. It disposed of about 98% of its assets in five years and was wound up in 1997. Nordbanken, cleaned up, later became part of Nordea. Securum is the classic success story: a "good bank / bad bank" split, with the bad bank run on commercial lines.
Malaysia: Danaharta (1998)
After the 1997 Asian financial crisis, Malaysia set up Pengurusan Danaharta Nasional Berhad under its own law, the Danaharta Act, 1998. It bought loans of at least RM 5 million at an average discount of 55%, and selling banks kept the right to 80% of any recovery above Danaharta's acquisition cost. Banks that refused Danaharta's offer had to write the loan down to 80% of the offer price. Danaharta also had special legal powers: it could appoint special administrators without going to court and foreclose quickly. The profit-sharing design is close to India's SR model, where the bank shares in the upside.
What India took, and what it did not
India's NARCL borrowed the guarantee idea and the upside-sharing of SRs, but differs in three ways. It pays mostly in SRs, not cash or government bonds. It has no special legal powers of its own, relying on SARFAESI and the IBC like any ARC. And it was set up late, three years after the NPA peak, when banks had already provided for most of these loans.
Criticisms of ARCs
- Low recoveries. For years ARCs recovered only a small part of the dues they acquired. An RBI study found the ARC industry concentrated among a few large players, and the slow, partial recoveries led to the 2022 reforms. Recovery rates measured against acquisition cost (about 85–90% in Crisil's rated pools) look far better than those measured against the original dues, because ARCs buy at deep discounts.
- Risk stays with banks. In 15:85 deals banks keep most of the risk through SRs. The "sale" is partly an accounting move.
- Evergreening. ARCs have been used to hide bad loans, for example by selling an NPA to an ARC and lending to the ARC or the borrower's group. The RBI responded with the ban on bilateral sales to sponsors, the rule that SR investments be marked to NAV, and stricter disclosure.
- Settlements with promoters. ARCs have settled with the very promoters who defaulted, sometimes at low values. Hence the Independent Advisory Committee and the ban on restructuring fraud and wilful-default accounts with the same promoters.
- Fee-driven model. When ARCs held only small slices of SRs, they earned fees whether or not they recovered. Fees are now linked to recoveries.
- NARCL's slow start. Price disputes with banks and the two-company structure delayed deals, and the guarantee shifts the risk of over-payment to the taxpayer.
Worked examples
Example 1: a private ARC deal
A bank has a ₹1,000 crore NPA, provisioned at 70% (₹700 crore). Its net book value is ₹300 crore. An ARC wins the auction at ₹300 crore in a 15:85 structure.
- Price as a share of dues: 300 ÷ 1,000 = 30%, a 70% haircut.
- SRs issued: ₹300 crore. The ARC subscribes 15% = ₹45 crore, in cash, which goes to the bank. The bank takes 85% = ₹255 crore of SRs.
- Bank's books on the sale date: loan of ₹300 crore (net) out; ₹45 crore cash plus ₹255 crore of SRs in. No gain or loss, because the price equals net book value.
- Is the ARC's investment enough? Minimum = higher of 15% × 255 = ₹38.25 crore, or 2.5% × 300 = ₹7.5 crore. So ₹38.25 crore. The ARC's ₹45 crore clears it.
Good outcome. In four years the ARC recovers ₹420 crore. Expenses and fees take ₹20 crore, leaving ₹400 crore for SR holders, shared pro rata: the bank's 85% gets ₹340 crore and the ARC's 15% gets ₹60 crore. The bank receives ₹45 crore + ₹340 crore = ₹385 crore on an asset carried at ₹300 crore: a write-back of ₹85 crore. The ARC turns ₹45 crore into ₹60 crore plus its fees.
Bad outcome. The ARC recovers only ₹170 crore, and ₹20 crore goes on costs, leaving ₹150 crore. The bank's SRs get ₹127.5 crore against a face value of ₹255 crore. It loses ₹127.5 crore on top of the ₹700 crore already provided. This is why the 15:85 structure leaves most of the risk with the bank.
Example 2: the same loan sold to NARCL
NARCL buys the same loan for ₹300 crore: ₹45 crore cash and ₹255 crore of guaranteed SRs. On resolution, the account yields ₹180 crore for SR holders.
- Shortfall = face value − realisation = 255 − 180 = ₹75 crore.
- The government guarantee pays the ₹75 crore (within the ₹30,600 crore ceiling), so the bank recovers the full ₹255 crore of SR face value.
- The bank gets ₹45 crore + ₹255 crore = ₹300 crore, its full net book value. The ₹75 crore loss falls on the taxpayer.
The guarantee caps the bank's loss, but it does not raise the SRs above face value: any upside above ₹255 crore is shared, as in a private deal.
Example 3: how much of the guarantee is used?
If ₹22,000 crore of the ₹30,600 crore guarantee is used, the share used = 22,000 ÷ 30,600 = 71.9%, and the headroom left = 30,600 − 22,000 = ₹8,600 crore. This is one reason NARCL is looking at deals outside the guarantee.
Example 4: the minimum investment when the ARC pays all cash
An ARC buys a ₹500 crore pool for ₹200 crore, paying the bank ₹200 crore in cash. The bank holds no SRs; the ARC holds all ₹200 crore.
- 15% of transferor's SRs = 15% × 0 = 0.
- 2.5% of total SRs = 2.5% × 200 = ₹5 crore.
- The minimum is ₹5 crore, but the ARC already holds all ₹200 crore, so the rule binds only if it later sells SRs to other investors. It could sell up to ₹195 crore of SRs to other QBs and still comply.
Common exam traps
- ARCs are not NBFCs. They are registered under Section 3 of the SARFAESI Act, not Section 45-IA of the RBI Act.
- The 15% rule is 15% of the transferor's SRs, not 15% of total SRs, and the alternative is 2.5% of total SRs, whichever is higher. The flat 15% applied only until October 2022.
- ₹300 crore vs ₹1,000 crore. ₹300 crore is the minimum NOF for any ARC; ₹1,000 crore is needed to be an IBC resolution applicant.
- NARCL vs IDRCL. NARCL buys (PSBs 51%); IDRCL resolves (PSBs and public FIs at most 49%). Do not swap them.
- ₹30,600 crore is a guarantee, not a capital infusion. It is paid only if realisation falls short of SR face value, on resolution or liquidation.
- 15:85 means 15% cash, 85% SRs, not 15% SRs.
- Realisation period: five years, extendable to eight. The planning period is six months.
- RTC was American (1989–1995), Securum Swedish (1992), Danaharta Malaysian (1998).
Key facts at a glance
| Governing law | SARFAESI Act, 2002; ARCs registered with RBI under Section 3 |
| First ARC | ARCIL |
| Current rules | RBI (ARC) Directions, 2025 (28 November 2025) |
| Minimum NOF | ₹300 crore (₹2 crore until 2016; ₹100 crore from 2017; ₹300 crore by 31 March 2026) |
| NOF to be IBC resolution applicant | ₹1,000 crore |
| ARC's minimum SR investment | Higher of 15% of transferor's SRs or 2.5% of total SRs |
| Realisation period | 5 years, extendable to 8; planning period 6 months |
| Settlement above ₹1 crore | Needs Independent Advisory Committee review |
| Security receipt | Section 2(1)(zg); issued to qualified buyers; must carry a recovery rating |
| NARCL | Announced Budget 2021-22; incorporated 7 July 2021; RBI registration 4 October 2021 |
| NARCL ownership | PSBs 51% |
| IDRCL ownership | PSBs and public FIs at most 49% |
| NARCL deal terms | 15% cash, 85% SRs; accounts of ₹500 crore and above; target about ₹2 lakh crore |
| Government guarantee | ₹30,600 crore, approved 15 September 2021, valid five years |
| NARCL progress | 33 entities, ₹1,65,862 crore by March 2026; recoveries ₹6,345 crore (₹4,364 crore in 2025-26) |
| Private ARC AUM | About ₹1.05 lakh crore of SRs expected for 2025-26 (Crisil) |
| Global bad banks | RTC (US, 1989–1995), Securum (Sweden, 1992–1997), Danaharta (Malaysia, 1998) |
Exam corner: what to remember
- SARFAESI Act, 2002: enforce security without courts (Section 13, 60-day notice) and register ARCs (Section 3). Upheld in Mardia Chemicals (2004).
- ARC deal: auction → trust → SRs to qualified buyers → recovery within 5 (max 8) years → waterfall.
- Skin in the game: higher of 15% of transferor's SRs or 2.5% of total SRs (since 11 October 2022).
- NOF: ₹300 crore (deadline 31 March 2026); ₹1,000 crore for IBC resolution applicants.
- Governance: Independent Advisory Committee for settlements above ₹1 crore; no bilateral purchases from sponsors; recovery ratings and NAV for SRs.
- NARCL: Budget 2021-22; PSBs 51%; 15:85; ₹30,600 crore guarantee for five years; accounts ≥ ₹500 crore; target ₹2 lakh crore.
- IDRCL: the resolution arm; private lenders 51%. A merger of the two was reported in 2026.
- March 2026: NARCL had 33 entities and ₹1,65,862 crore; recovered ₹4,364 crore in 2025-26.
- Bad banks abroad: RTC (FIRREA 1989, 747 thrifts, closed 31 December 1995); Securum (Nordbanken, 1992, 98% sold in five years); Danaharta (1998, 55% average discount, 80% upside to banks).
Test yourself
Asset reconstruction companies in India are registered by the RBI under:
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Answer: (b) ARCs are registered under Section 3 of the SARFAESI Act and are not a class of NBFC.
Existing ARCs had to raise their minimum net owned fund to ₹300 crore by:
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Answer: (c) The October 2022 glide path required ₹200 crore by 31 March 2024 and ₹300 crore by 31 March 2026.
Under the current rules, an ARC must invest in each class of SRs the higher of:
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Answer: (b) The October 2022 rule replaced the flat 15% with the higher of 15% of the transferor's SRs or 2.5% of total SRs.
The Union Cabinet approved a government guarantee on security receipts issued by NARCL of up to:
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Answer: (b) The ₹30,600 crore guarantee, approved in September 2021, covers the shortfall between SR face value and realisation; ₹2 lakh crore was the target of loans to be acquired.
According to the Finance Ministry, by March 2026 NARCL had acquired debt of about ₹1.66 lakh crore from how many borrower entities?
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Answer: (c) It had acquired 33 borrower entities with an aggregate debt exposure of ₹1,65,862 crore.
Which entity in India's bad bank structure is majority-owned by private sector lenders?
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Answer: (b) In IDRCL, PSBs and public FIs hold at most 49%; in NARCL, PSBs hold 51%.
A bank sells an NPA with dues of ₹800 crore to an ARC for ₹240 crore under a 15:85 structure. How much cash does the bank receive upfront?
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Answer: (b) 15% × 240 = ₹36 crore in cash; the remaining ₹204 crore is paid in SRs.
In a NARCL deal, the bank holds guaranteed SRs with a face value of ₹340 crore. On resolution, the realisation for these SRs is ₹260 crore. How much would the government guarantee pay?
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Answer: (c) The guarantee covers the shortfall: 340 − 260 = ₹80 crore, within the overall ₹30,600 crore cap.
The Resolution Trust Corporation, often cited as a model bad bank, was set up to resolve failed:
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Answer: (b) The RTC was created by FIRREA in 1989 and resolved 747 US thrifts before closing on 31 December 1995.
An ARC wants to act as a resolution applicant under the IBC for activities not otherwise permitted under SARFAESI. Its minimum net owned fund must be:
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Answer: (d) ₹1,000 crore is the threshold for acting as a resolution applicant; ₹300 crore is the general minimum.
Further reading
- RBI, FAQs on Asset Reconstruction Companies (11 September 2026): the RBI's own answers on ARC status, realisation periods, upside and fees, with references to the 2025 Directions.
- RBI, Master Direction: Asset Reconstruction Companies Directions, 2024: the full rulebook before the 2025 consolidation; the NOF glide path, SR investment, settlement and acquisition rules are all here.
- RBI, draft ARC Second Amendment Directions, 2026: the latest proposals on compliance and internal audit in ARCs.
- Crisil Ratings, cumulative recovery rate for ARCs to rise to 90% (31 March 2026): the best recent data on SR recoveries by sector.
- Crisil Ratings, private ARC AUM may drop 4–6% (10 July 2025): why the private ARC industry is shrinking.
- IMF, Ingves, Seelig and He, Issues in the Establishment of Asset Management Companies (2004): the standard comparison of bad banks worldwide, including Securum and Danaharta, by a future Swedish central bank governor.
- Federal Reserve History, The Savings and Loan Crisis and Its Relationship to Banking: a short history of the crisis that produced the RTC.
Sources
- RBI, FAQs on ARCs: ARCs not NBFCs; registration under Section 3; ₹1,000 crore NOF for IBC resolution applicant; eight-year maximum realisation period; upside and yield recognition; fee rules; fraud and wilful default accounts; references to the ARC Directions, 2025 of 28 November 2025 (accessed 24 October 2026)
- RBI, Master Direction – ARC Directions, 2024 (24 April 2024): ₹300 crore NOF and glide path; minimum SR investment; five-to-eight-year realisation; six-month planning period; registration and commencement; permitted measures; ₹1,000 crore for IBC; settlement policy and IAC for accounts above ₹1 crore; ban on bilateral acquisition from sponsors; SRs issued to qualified buyers (accessed 24 October 2026)
- AZB & Partners, Review of regulatory framework for ARCs: the 11 October 2022 changes, including NOF, SR investment, recovery ratings, IBC, surplus funds (accessed 24 October 2026)
- Crisil, Revised RBI guidelines to structurally strengthen ARCs (17 October 2022): more than half of ARCs below ₹300 crore NOF; cash deals 36% of rated SRs in February 2022 vs 4–5% in February 2017 (accessed 24 October 2026)
- Governance Now, Decoded: new set of regulations for ARCs (28 October 2022): RBI committee of April 2021 reporting in September 2021; NOF history of ₹2 crore, ₹100 crore and ₹300 crore (accessed 24 October 2026)
- King Stubb & Kasiva, RBI (ARC) Directions, 2025: issue date 28 November 2025 and key norms (accessed 24 October 2026)
- TeamLease RegTech, ARC Amendment Directions, 2026: 10 March 2026 amendment on quarterly profits in owned funds (accessed 24 October 2026)
- RBI, Connect 2 Regulate: draft ARC Second Amendment Directions, 2026: 10 June 2026 draft on compliance and internal audit; comments by 9 July 2026 (accessed 24 October 2026)
- TaxGuru, RBI ARC Supervisory Returns Directions, 2026: 31 July 2026 directions; DNBS07, DNBS10, DNBS13 (accessed 24 October 2026)
- Crisil Ratings, 31 March 2026: recovery rate about 85% in 2025-26 and about 90% in 2026-27; sector shares; corporate assets 92% (accessed 24 October 2026)
- Crisil Ratings, 10 July 2025: private ARC AUM down 15% in 2024-25 (5% excluding a ₹13,000 crore write-off), expected about ₹1.05 lakh crore in 2025-26; SR issuance ₹31,000 crore and ₹22,000 crore; redemptions over ₹28,600 crore (accessed 24 October 2026)
- Business Standard, Recovery under IBC improves to nearly 37% in FY25 (29 December 2025): IBC and SARFAESI recovery rates in 2024-25 from the RBI Trend and Progress report (accessed 24 October 2026)
- Wikipedia, SARFAESI Act, 2002: ARCIL as first ARC; exemptions for loans below ₹1 lakh and dues below 20%; Mardia Chemicals judgment of 8 April 2004; 2016 amendment (accessed 24 October 2026)
- Drishti IAS, New bad bank structure (17 September 2021): ₹30,600 crore guarantee; five-year validity; 15:85; ownership of NARCL and IDRCL; SR definition under Section 2(1)(zg) (accessed 24 October 2026)
- Governance Now, Bad bank: all you wanted to know about NARCL (16 September 2021): Cabinet decision on Wednesday, announcement on Thursday; ₹500 crore account size; Phase I of ₹90,000 crore; rising guarantee fee; IDRCL role; 28 existing ARCs (accessed 24 October 2026)
- IMPRI, NARCL policy update (23 August 2026): incorporation 7 July 2021; RBI registration 4 October 2021; March 2026 progress; criticism of the dual structure (accessed 24 October 2026)
- Social News / IANS, NARCL recovers ₹4,364 crore in FY26 (30 April 2026): Finance Ministry statement; 33 entities, ₹1,65,862 crore; ₹6,345 crore from 23 accounts; three full resolutions at 148%, 115% and 183% (accessed 24 October 2026)
- Kotak Neo, NARCL expansion beyond sovereign guarantee (23 June 2026): about ₹22,000 crore of guarantee used; smaller accounts below ₹500 crore (citing the Economic Times) (accessed 24 October 2026)
- Kotak Neo, NARCL and IDRCL merger (updated 17 August 2026): reported merger plan, citing the Economic Times of 24 March 2026 (accessed 24 October 2026)
- Whalesbook, NARCL recovers ₹575 crore (18 June 2026): Agson Global exit, fifth full exit, extra distribution of nearly ₹200 crore (accessed 24 October 2026)
- Business Standard, NARCL emerges as top bidder for SREI twins (4 January 2023): NPV offer of ₹5,555 crore (headline) (accessed 24 October 2026)
- Federal Reserve History, Savings and Loan Crisis: RTC created by FIRREA 1989, 747 thrifts, closed 31 December 1995, cost up to $124 billion (accessed 24 October 2026)
- Wikipedia, Resolution Trust Corporation: total assets of $394 billion; transfer of duties to the FDIC (accessed 24 October 2026)
- Wikipedia, Securum: 1992 creation from Nordbanken; 3,000 credits to 1,274 companies; 24 billion kronor capital; wound down by 1997 (accessed 24 October 2026)
- IMF Policy Discussion Paper PDP/04/3 (2004): Danaharta's 55% average discount, 80% upside to banks, RM 5 million threshold, special powers; Securum disposed of 98% of assets in five years (accessed 24 October 2026)
- Wikipedia, Ministry of Finance (Malaysia): Pengurusan Danaharta Nasional Berhad Act 1998 (Act 587) (accessed 24 October 2026)