The Reserve Bank of India (RBI) committee has recently proposed several recommendations with the intent to refine Asset Reconstruction Companies’ (ARC) operations. This article will delve into the ARCs, their roles, performance, and important suggestions given by the RBI committee.
Understanding Asset Reconstruction Companies
ARCs are specialized financial institutions that purchase Non-Performing Assets (NPAs) from banks and financial institutions, enabling them to clean up their balance sheets. Typically, they buy banks’ bad debts, offer a portion as cash upfront (15% as mandated by the RBI), and issue security receipts (SRs) for the balance (85%). This assists banks to focus on regular banking activities rather than investing time and effort recovering from defaulters.
Legal Framework for ARCs
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, provides the legal foundation for establishing ARCs in India. This act facilitates the reconstruction of poor assets without court interference. Since its introduction, a significant number of ARCs have been formed and officially registered with the RBI, which retains the power to regulate them.
Performance of ARCs
Despite these efforts, ARCs’ performance has generally been lackluster, both in terms of recovery and business revitalization. Data indicates that lenders could recover only about 14.29% of the amount borrowers owed in terms of stressed assets sold to ARCs in the period from 2004-2013.
RBI’s Initiative to Enhance ARC Performance
In a bid to improve ARCs’ performance, the RBI established a committee, led by Sudarshan Sen, to identify issues and propose measures to enable ARCs to meet the growing requirements of the financial sector. The committee has proposed several key recommendations.
Key Suggestions by the RBI Committee
Among the key suggestions, the committee has proposed the creation of an online platform for selling stressed assets to ARCs. This is to ensure transparency and uniformity in the process. The committee has also recommended expanding the scope of Section 5 of the SARFAESI Act to allow ARCs to acquire ‘financial assets’ from a broader range of entities.
Provision for Additional Resources
ARCs are to be allowed to sponsor SEBI-registered Alternative Investment Funds to raise resources for restructuring bad loans purchased by them. The regulations should also permit ARCs to use the Insolvency and Bankruptcy Code (IBC) framework for resolving stressed assets.
Norms for Loan Sales to ARCs
The committee proposed that large loans and loans that have been in default for over two years should be considered for sale to ARCs by banks. Final approval of the reserve price should be given by a high-level committee.
Suggestions for Debt Aggregation
The committee also suggested that if 66% of lenders (by value) decide to accept an offer by an ARC, it should be binding on the remaining lenders and implemented within 60 days.
Proposed Role of NARCL
In respect to the proposed National Asset Reconstruction Company Limited (NARCL), the RBI should ensure fair competition between the NARCL and private ARCs to facilitate true price discovery through market mechanisms.
Anticipated Benefits of the Recommendations
By implementing these recommendations, banks can rid themselves of stressed loans earlier, helping ARCs raise resources by tapping different categories of market participants eligible for investment in security receipts.