Security Receipts (SRs) are financial instruments issued by Asset Reconstruction Companies (ARCs) to banks or financial institutions. These companies buy bad loans (called Non-Performing Assets or NPAs) from banks. These are loans that people or companies have stopped repaying.
How it works?
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Banks sell bad loans to ARCs.
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ARCs turn these loans into investment papers (SRs).
- ARCs issue Security Receipts to the bank, representing the underlying value of those distressed assets . It means SRs shows how much value or money could possibly be recovered from the bad loans (distressed assets) that an ARC has bought from banks.
- Big investors buy SRs, hoping the ARC will recover money from the borrowers.
- The ARCs try to recover the money from the borrowers over time.
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As recoveries happen, returns from the SRs flow back to the banks or investors.
Why it matters for banks?
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Helps banks clean up their balance sheets.
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Removes NPAs and improves asset quality metrics.
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Recovery from SRs over time improves the financial strength of the bank.
Key Points
- Security Receipts (SRs) get their value from bad loans (distressed assets) that borrowers haven’t paid back.
- when the ARC manages to recover money from those unpaid loans ,financial institutions own an SR have a right to get money.
- SRs are not easily tradable in open markets like stocks or bonds. They don’t have an active market, so it’s hard to find a buyer if anyone want to sell them — that’s why they’re called “illiquid.”
- SRs and how ARCs work are controlled by a special law in India called the SARFAESI Act, 2002. This law gives ARCs the power to take action to recover money from borrowers who haven’t paid their loans.
