Asset Reconstruction Companies (ARCs) play a pivotal role in the financial ecosystem, particularly in strengthening the health of the banking sector. Their primary function is to assist banks and other financial institutions in cleaning up their balance sheets by acquiring distressed or non-performing assets (NPAs). By doing so, ARCs help reduce the burden of bad loans on lenders, enabling them to refocus on their core function of credit disbursement and economic facilitation. This process not only improves financial stability but also aids in the revival of distressed borrowers through professional management and restructuring efforts.

However, as highlighted by Anit, the functioning and impact of ARCs are often constrained by several structural and operational limitations. One of the most significant challenges faced by ARCs is the lack of adequate capital. Since acquiring and managing distressed assets requires substantial upfront investment and a long-term financial commitment, limited capital can significantly restrict the scale at which ARCs can operate. Additionally, the resolution of NPAs is a complex, time-consuming process that involves legal hurdles, asset valuation issues, and often, prolonged negotiations with stakeholders.

Furthermore, regulatory and procedural complexities add to their burden. Although regulatory reforms such as the Insolvency and Bankruptcy Code (IBC) have provided ARCs with more resolution mechanisms, the actual implementation on the ground can be slow and inconsistent. The involvement of multiple regulatory bodies and the need to adhere to strict compliance norms further complicate the operational landscape for ARCs.

In summary, while ARCs are an essential component of the financial resolution framework, their impact is often limited by a combination of financial, operational, and regulatory challenges. Addressing these bottlenecks through better capitalization, operational strengthening, and policy support could significantly enhance their effectiveness in resolving India’s growing pool of distressed assets.