Asset Reconstruction Companies not working as per their mandate to reconstruct and recover stressed assets: RBI

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Mumbai (Maharashtra): The Reserve Bank of India raised alarm on the functioning of the Asset Reconstruction Companies (ARCs) by highlighting that the ARCs not working as per their mandate to reconstruct and recover the assets.

The Deputy Governor of RBI Swaminathan Janakiraman says that the ARCs are becoming a warehouse of the stressed assets while the original lenders continue to handle collection and custody of the security provided by borrowers.

“We have also come across instances where ARCs have warehoused the stressed assets, while the originator has continued to remain responsible for the collection as well as custody of the security provided by the borrower” said Deputy Governor while speaking at the Conference of Asset Reconstruction Companies (ARCs) in Mumbai.

He also urged the ARCs to reevaluate their operations, especially when managing assets of stressed companies, suggesting that acting as warehousing agencies for a fee does not align with the intended framework
“ARCs may like to introspect whether they would like them to be a warehousing agency for a fee, which is certainly not in consonance with the underlying intent of the framework” said the Deputy Governor.

An Asset Reconstruction Company (ARC) is a financial institution that buys non-performing assets (NPAs) or bad loans from banks and financial institutions. This helps banks clean up their balance sheets and improve liquidity in the system.

Finance Minister, in the Union Budget 2021 announced the formation of an ARC structure, comprising two entities viz. National Asset Reconstruction Company Limited (NARCL), and India Debt Resolution Company Limited (IDRCL) for aggregation and resolution of Non-Performing Assets (NPAs) in the banking industry.

The Deputy Governor also highlighted that the data reveals that one-time settlements and rescheduling of debt are the predominant measures by Asset Reconstruction Companies (ARCs). “A review of the data indicates that one-time settlements and rescheduling of debt are the predominant measures of reconstruction employed by ARCs” he added.
He points out that these measures are not unique to ARCs. Lenders, such as banks and financial institutions, have the capability and authority to implement similar strategies directly. By doing so, lenders could potentially manage and recover their non-performing assets (NPAs) without needing to offload them to ARCs.

One-time settlements typically involve negotiating a lump-sum payment from the borrower, often at a discount, to settle the outstanding debt. Rescheduling of debt, on the other hand, involves altering the terms of the existing debt agreements, such as extending the repayment period or reducing the interest rate, to make it easier for the borrower to meet their obligations.

NARCL a government entity, was incorporated on 7th July 2021 with a majority stake held by Public Sector Banks and a balance by Private Banks with Canara Bank being the Sponsor Bank. NARCL is registered with the Reserve Bank of India as an Asset Reconstruction Company under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. NARCL has been set up as a strategic initiative to clean up the legacy stressed assets with an exposure of Rs 500 crore and above in the Indian Banking system.

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