The problem of recovery from NPAs, in the Indian banking system, was recognized by the Government of India (GOI) as far back as in 1997, when the "Narasimhan Committee" was appointed. The Narasimhan Committee Report mentioned that an important aspect of the continuing reform process was to reduce the high level of NPAs as a means of banking sector reform. It was expected that with a combination of policy and institutional development, new NPAs in future could be lower, however, the problem of the huge backlog of existing NPAs still remained. This problem of NPAs, impinged severely on banks performance and their profitability. The Report envisaged creation of an "Asset Recovery Fund" to take the NPAs off the lender"s books at a discount.

Unlike in some countries where ARCs have been set up post financial crises and for the purpose of bailout, in India, the GOI proactively initiated certain measures to control NPAs. In order to regulate and control the NPAs and quicken recovery, the GOI set up Debt Recovery Tribunals and Debt Appellate Tribunals under the "Recovery of Debts Due to Banks and Financial Institutions Act, 1993". As a corollary to this and to speed up the process of recovery from NPAs, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, was enacted by the GOI for regulation of securitisation and reconstruction of financial assets and enforcement of security interest by secured creditors, including Securitisation or Reconstruction Companies (SC/RC).

RBI has already issued guidelines/directives to ARCs and banks and financial institutions for transfer of assets to ARCs, defining prudential guidelines for ARCs and permitting Indian banks and financial institutions to participate in papers issued by ARCs.

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