Down the Rabbit Hole: Asset reconstruction companies and the bad debt of Indian banks C. P. Chandrasekhar

The finance minister’s Budget speech 2021 revealed the government’s plans to establish an Asset Reconstruction Company to take over bad debt from the books of public sector banks for eventual disposal. That suggests that the ARC route rather than recapitalisation would in the coming months be the main means of refurbishing capital in the public banking system. Since there are as many as 28 ARCs already in existence, the reason why the creation of one more would resolve a problem that is expected to worsen over the coming year is unclear. In fact, past experience indicates that ARCs have not helped enhance the actual recovery of lock-up in stressed assets. This suggests that the move is a means to postpone the problem of bad debt resolution so as to avoid having to recapitalise the banks with budgetary resources, which would widen the central fiscal deficit.

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(This article was originally published in the Economic and Political Weekly on May 15, 2021.)