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RBI panel on ARCs

Posted on November 3, 2021 by admin1  431

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  • The committee, headed by former RBI Executive Director Sudarshan Sen, has recommended the creation of an online platform for the sale of stressed assets.

Need of the reforms

  • Poor performance of Asset Reconstruction Company (ARC):
    • The performance of the ARCs has so far remained lacklustre, both in ensuring recovery and in the revival of businesses.
  • Low Recovery Rate of Stressed Assets:
    • Lenders could recover only about 14.29% of the amount owed by borrowers in respect of stressed assets sold to ARCs in the 2004­ – 2013 period. 

Non-Performing Assets (NPAs) 

  • When a person delays the payment of the loan or an amount that was due on him.
    • Through the delay in payment in either interests or instalments or principal amount, that particular loan or amount is termed as NPA.
  • For agricultural loans, if the interest and/or the installment or principal remains overdue for two harvest seasons; it is declared as NPAs. 
    • But, this period should not exceed two years. 
    • After two years any unpaid loan/installment will be classified as NPA.

Classification of NPAs

Criteria

Substandard Assets

The assets which have remained NPA for a period of less than or equal to 12 months

Doubtful Assets

If the asset is in the substandard category for a period of 12 months

Loss Assets

These assets are of little value, it can no longer continue as a bankable assets, there could be some recovery value.

Mandate or Terms of Reference of the Committee

  • To examine the issues and recommend measures for enabling ARCs to meet the growing requirements of the financial sector.
  • To streamline the functioning of asset reconstruction companies (ARCs).
  • To improve the performance of ARCs, the RBI had appointed the committee.

Suggestions made by the panel

  • Creation of an online platform for the sale of stressed assets.
  • Allowing ARCs to act as resolution applicants during the IBC process.
  • The scope of Section 5 of the SARFAESI Act be expanded to permit ARCs to acquire financial assets from all regulated entities.
    • All regulated entities include AIFs, FPIs, AMCs making investments on behalf of MFs and all NBFCs including HFCs.
  • For accounts above ? 500 crores, two banks approved external valuers should carry out a valuation to determine liquidation value and fair market value. 
  • Also, the final approval of the reserve price should be given by a high-level committee that has the power to approve the corresponding write­off of the loan.

Asset Reconstruction Company (ARC)

  • It is a specialized financial institution that buys the Non-Performing Assets (NPAs) from banks and financial institutions 
    • NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • They can clean up their balance sheets.
  • Banks, rather than going after the defaulters can sell the bad assets to the ARCs at a mutually agreed value.
    • It helps banks to concentrate on normal banking activities. 
  • The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 
    • Provides the legal basis for the setting up of ARCs in India.
    • The Act helps reconstruction of bad assets without the intervention of courts. 
    • A large number of ARCs were formed and were registered with the RBI.
    • RBI has got the power to regulate the ARCs.

Expected Benefits from the recommendations

  • Transparency in Auction:
    • Due to the sale of stressed assets on the online platform, the ambiguities or chances of corruption by ARCs will go down.
    • Further approval of 2 banks for accounts above ? 500 crores, will also ensure transparent valuations.
  • Empower the ARCs for more efficient functioning:
    • Making ARCs as the resolution applicant under IBC will help them settle the matter in an easier way.
    • Increasing the SARFAESI mandate to give more powers to ARCs will increase their reach.
  • Quicker Resolution:
    • Direct involvement of the high-level committee will lead to faster decisions.

 Conclusion and Way Forward

  • The RBI has sought different stakeholders’ comments on the report by December 15, 2021.
    • Based on the suggestions, appropriate changes must be incorporated.
  • Further, as mentioned in the Economic Survey, lessons from the past must be learnt to remove regulatory forbearance.
    • ARCs are the cure to the problem but with proper planning and execution, the prime target should be to promote healthy lending practices.

Source: TH

 
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