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The Centre’s reported plan to set up an asset reconstruction company (ARC) with the equity contribution from the government and the Reserve Bank of India (RBI) is welcome. Overview of an ARC-An asset reconstruction company’s primary goals is to manage and make profitable those assets which have been underperforming or become formally classified as NPA’s belonging to those companies who have been unable to generate sufficient timely revenue to service their outstanding obligations. Extraordinary situations call for extraordinary responses. In the US, in the aftermath of the 2008 financial crisis, the Federal Reserve supplied liquidity to banks and restored the flow of credit. The plan, designed to give bands the incentive to replace (state) capital when conditions permitted, worked successfully. An ARC would buy out distressed loans from banks, at a discount. Once a non-performing asset is sold off, it would disappear from the glance-sheet of the Selling bank. This, in turn, would clean up is books and enable the bank to start lending afresh. Truisms the bank would take a haircut but that is vital to bringing down the cost of the project, now taken over by the ARC, to9 a realistic level. Writing off of the promoter’s equity, converting the banks’ debt into equity and bringing the inflated project Cost to realistic level is just the beginning. Transfer to the ARC would extricate stalled projects from their promoters. To get them executed, the ARC would rope in professional managers, offering them chunks of equity when they achieve preset milestones. The completed project could be sold and the Proceeds used to pay off the ARC’s financiers and even kick some more money back to the banks. How the ARC should found itself. It scans issue bonds for the RBI to subscribe. Yes, this would amount to liquidity creation by the RBI. On a scale far in excess of the open market operations, it undertakes in the normal course. But let us recall that the basic achievement of the Fed’s quantitative easing policy, of buying up bonds, was to recapitalize the banks: relieved of the bonds them, held, the banks’ requirement of capital came down. Bu financing the ARC and enabling it to byte distressed bank assets at a discount, the RBI would both recapitalize the banks to some extent and also help implement stalled projects. This is the time for bold imagination and action. This, in turn, would clean up its books and enable the bank to start lending a fresh. True, the bank would take a haircut but that is vital to bring down the cost of the projects, now taken over by the ARC, to realistic levels.