Mounting bad debts would only worsen the situation further for two reasons. The obvious one being the loss of both the principal and the interest for a majority of such loans. Besides, the lower ratings that could result from the deterioration of the quality of their assets would inevitably lead to higher borrowing cost. Therefore, the urgent desire of the FIs to effectively tackle the issue of non-performing assets is perfectly justified.

However, setting up an ARC for the purpose does not appear to be a good solution. True, the FIs would be able to transfer their bad assets to the ARC's booksthereby "cleaning up" their books. But this clean-up would only be cosmetic as the process would do nothing to ameliorate the basic problem -- that of loan recovery.

It may be argued that the ARC would serve as a specialised agency for loan recovery, as well. However, such an argument holds little water as each FI is equipped with a specialised team for the purpose and it is doubtful that the ARC would perform any better than the FIs themselves. It is mainly the inefficient legal system that comes in the way of speedy recoveries and merely setting up an ARC would therefore be of little help. The only constructive purpose this could perhaps serve is that the FIs would be forced to become more transparent about their bad loans.