RBI Committee on Asset Reconstruction Companies
A committee of the Reserve Bank of India (RBI) has issued comprehensive instructions to streamline the operations of Asset Reconstruction Companies (ARCs).
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| (RBI Committee on Asset Reconstruction Companies) |
Back to basics: Asset Reconstruction Companies (ARCs)
It is a specialized financial institution that buys Non Performing Assets (NPAs) from banks and financial institutions so that they can keep their balance sheets clean.
An NPA is a loan or an advance for which a principal or interest payment is due for a period of 90 days.
Typically, banks purchase NPAs by paying a portion of the ARC as a cash advance (15% mandatory by the RBI), and issue security receipts for the remaining amount (85%).
It helps banks to focus on general banking activities. Instead of wasting their time and effort on banks defaulters, they can sell their NPAs to ARC at a mutually agreed price.
The Securitization and Reconstruction of the Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002 provides the legal basis for the establishment of ARC in India.
The SARFAESI Act assists in the reconstruction of non-functional property without the intervention of the court. A large number of ARCs were formed under this Act and were registered with the Reserve Bank of India (RBI).
The RBI has the power to regulate the ARC.
Background
The ARC's performance so far has been poor, both in ensuring the recovery and revival of businesses.
Lenders have been able to recover only 14.29 per cent of the total amount owed to the borrowers in respect of stressful assets sold to the ARC during the period 2004-2013.
To improve the functioning of the ARC, the RBI appointed a committee (chaired by Sudarshan Sen) to look into these issues and recommend measures to enable the ARC to meet the growing needs of the financial sector.
Suggestions
Online platform for sale of distressed assets:
Recognizing the need for transparency and uniformity of processes in the sale of distressed assets, the committee believes that an online platform could be created for the sale of such assets.
Expansion of the scope of the Surface Act:
The scope of Section 5 of the Surface Act can be extended to allow the ARC to acquire 'financial assets' for the purpose of reconstruction not only from banks and 'financial institutions' but also from institutions notified by the Reserve Bank.
Under the proposed powers, the RBI may also consider allowing the ARC to acquire financial assets from all regulated companies, including alternative investment funds (AIFs), foreign portfolio investors (FPIs), and asset management companies (AMCs).
To provide additional resources:
The ARC should be allowed to sponsor the alternative investment funds registered by SEBI to mobilize resources to facilitate the restructuring of bad loans purchased by them.
Use of IBC:
The ARC should be allowed to use the Insolvency and Bankruptcy Code (IBC) Framework for this purpose, which designates the ARC as the main vehicle for resolving distressed assets.
'Large loan' for sale to ARC:
‘Large loans’ defaulted for more than two years and loans can be offered to ARC for sale by banks. The final approval of the reserve price should be given by the high level committee.
The reserve price plays an important role in ensuring the real value in the auction held for the sale of distressed property.
To ensure debt consolidation:
The Committee recommends that if 66% of lenders (based on price) decide to accept a proposal by the ARC, it may be binding on the remaining lenders and must be implemented by a majority of lenders (66%) within 60 days of approval.
Total loan means the total capital and interest owed by the borrower to the creditors at the time of execution of the loan settlement agreement.
If the lender fails to agree, it will be subject to 100% provision on the outstanding loan.
Loan Provision: Provisioning booking means that the bank recognizes the loss on the loan prematurely.
For NARCL:
In the context of the National Asset Reconstruction Company Limited (NARCL) proposed by India to balance the balance sheet of public sector banks (PSBs), the RBI should conduct fair competition between NARCL and the private ARC mechanism to promote real value finding objectives through the market.
Expected benefits
Getting Rid of Stressful Debt:
The suggestions made by the committee are aimed at enabling banks to get rid of distressed loans at an early stage of default and motivate unwanted minority lenders to join the sale. Criteria also attempts to hire appraisers for the large valuations sold.
Help mobilize ARC resources:
The recommendations are timely and will help the ARC mobilize resources by exploiting the various categories of market participants eligible for investment in security receipts.
Banks are also encouraged to expedite the sale of NPAs (non-performing assets) with a two-year provision (timely repayment of loans).
Question about RBI Committee on Asset Reconstruction Companies
Q. 1) Consider the following statements about the RBI Committee on Asset Reconstruction Companies.
1. Provisioning booking means loss on bank loan recognizes prematurely.
2. The ARC should be allowed to use the Insolvency and Bankruptcy Code (IBC) framework for this purpose.
3. An NPA is a loan or an advance for which the principal or interest payment is due for a period of 90 days.
4. Total loan means the total capital and interest owed by the borrower to the creditors at the time of execution of the loan settlement agreement.
Which of the above statements is correct?
(A) 1,2,3 (B) 2,3,4
(C) 1,2,4 (D) 1,2,3 and 4
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