By S&S Co. Advocates & Solicitors · Published 13 July 2026 · Informational content, not legal advice. See our disclaimer
What an Asset Reconstruction Company Is
An Asset Reconstruction Company (ARC) is a specialised entity, registered with and regulated by the Reserve Bank of India under the SARFAESI Act, 2002, whose business is to acquire non-performing loans from banks and other lenders and then work to recover or resolve them: through negotiated settlement, enforcement of security, restructuring, or, where the borrower is under insolvency, participation in the resolution process. ARCs typically fund the acquisition partly through their own capital and partly by issuing Security Receipts to qualified institutional buyers, including the selling bank itself.
How a Loan Transfer to an ARC Works
When a bank transfers a stressed loan to an ARC, it assigns the underlying debt and, where applicable, the associated security interest, in exchange for an upfront consideration and, typically, Security Receipts representing a residual interest in whatever the ARC eventually recovers. Once the transfer is complete, the ARC steps into the shoes of the original lender as the secured creditor of record for purposes of SARFAESI enforcement, DRT proceedings, or any insolvency application relating to that debt.
What It Means for the Borrower
A borrower whose loan has been sold to an ARC continues to owe the same underlying debt, on the same terms unless renegotiated, but now deals with the ARC rather than the originating bank for recovery, settlement or restructuring discussions. Borrowers sometimes assume a sale to an ARC (often associated with deep-discount recoveries) signals an opportunity for a more favourable settlement, but ARCs are commercial entities pursuing maximum recovery on the debt they have acquired, and settlement terms depend on the specific facts of each case rather than any general rule.
Regulatory Scrutiny of ARC Transactions
Because ARC transactions can involve significant write-downs of public money when the seller is a public sector bank, such transactions have increasingly attracted judicial and regulatory scrutiny over valuation methodology, the competitiveness of the sale process, and whether adequate due diligence was conducted before agreeing to a particular discount: banks and ARCs alike are expected to be able to justify the commercial basis for the price at which a stressed loan was transferred.
Frequently Asked Questions
Does selling a loan to an ARC change the amount the borrower owes?
Not automatically: the borrower's liability for the underlying debt continues on the same terms unless the ARC and borrower separately agree to a restructuring or settlement; the discount at which the ARC acquired the debt from the bank does not by itself reduce what the borrower owes.
Can an ARC use SARFAESI to enforce security after acquiring a loan?
Yes. Once the transfer is validly completed, the ARC becomes the secured creditor of record and can use SARFAESI's enforcement machinery, subject to the same statutory procedure and safeguards that applied to the originating bank.
What are Security Receipts?
Security Receipts are instruments issued by an ARC to investors (including, often, the selling bank itself) representing an undivided interest in the underlying stressed assets the ARC has acquired: their eventual value depends on how much the ARC actually recovers.
References & Further Reading
This article references the following statutory provisions and regulatory materials. Readers should always verify current rules, circulars and timelines against the applicable statute, regulation or RBI direction as amended, since these are revised from time to time.
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
- Reserve Bank of India, Master Directions on Asset Reconstruction Companies.