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Global ARC Models
Global Arc Models
Broadly 3 different models have been adopted internationally:
Model I: Government owned ARCs came into existence to deal with banking crisis to find a system-wide solution and act as nodal entities to address NPA “stock”. The success of this model is predicated on fiscal support (by way of recapitalisation of banks) and forbearance from the Government and the regulator. This model results in a clean exit from NPAs to the banks. Resolution and consequent risks-rewards remains with investors.
Model II: Non-governmental ARCs model has been adopted in situations of high level of NPAs but without crisis dimensions. This model adopts a market based approach to address NPA “stock” & “flow”. There is no direct participation by Government. Only a conducive framework is provided by Government and Regulator for resolution and exit. This model requires presence of willing sellers and investors. Attendant risk and reward remain with investors. A strong regulatory inducement is essential for the success of this model.
Model III: A “Bad Bank” is carved out within a bank by isolation of stressed assets as the bank’s work – out group / affiliate. This is a “self help” mechanism without any special powers from Government and Regulator. In this model, the focus is on NPA workout. This model leaves the NPAs with banks and consequently, the attendant risk and reward remains with them. This model has achieved limited success due to the absence of debt aggregation.