Global Economy

RBI to set up task force to review working of asset reconstruction companies

India’s central bank on Wednesday announced setting up of a task force to review the regulatory framework governing asset reconstruction companies (ARCs). Governor Shaktikanta Das said that the committee would make recommendations on the policy environment for rehabilitation companies.

The committee is likely to look into the long standing request of ARCs to participate in the bankruptcy process and lower the cost of participating in buying distressed assets.

“ARCs play an important role in the resolution of stressed assets, their potential, however, is yet to be fully realised,” Governor Das said as part of his monetary policy statement on Wednesday. “It is proposed to constitute a committee to undertake a comprehensive review of the working of ARCs and recommend measures to enable these entities to meet the growing requirements of the financial sector.”

Reconstruction companies have in the past requested the RBI to issue guidelines regarding eligibility of ARCs to act as Resolution Applicant in insolvency cases. Currently, several high stake insolvency cases like

and Aircel are stuck because the regulator wants ARCs to go by the rules dictated by the Sarfaesi law. Although the bankruptcy code is a recent piece of legislation, it allows ARCs to act as resolution applicants.

These companies also want the regulator to review the dual provisioning norms applicable to banks on sale of stressed assets to ARCs on security receipts structure. They also want the RBI to relax mandatory contribution by ARC of 15% even in cases of 100% cash sale by banks. ARCs have also sought funding from banks, widening the definition of qualified buyers to include HNIs, Corporates and NBFCs and allow these firms to deploy surplus funds to optimise returns.

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“The RBI should take this opportunity to take a holistic view and consider all aspects including legal framework, guidelines controlling AIFs and several other regulatory interventions that have impacted ARCs,” the CEO of a large ARC said on the condition of anonymity. “ARCs have made multiple requests to the RBI in the last two years, and I hope all those suggestions are presented to the committee.”

While the RBI has not outlined the terms of reference of this committee, in 2011 a Key Advisory Group (KAG) on ARC sector reforms was constituted by the Ministry of Finance with participation of all stakeholders and regulators.

The committee had reviewed the then legal, regulatory and institutional framework for ARCs plus devised an action plan including policy initiatives for orderly growth of the sector.

“The proposed committee is expected to analyse the challenges faced by ARCs and recommend measures for enhancing functional effectiveness of ARCs to play a significant role in distressed debt resolution, particularly in the background of likely sharp increase in NPAs in the system.” Hari Hara Mishra, presently Director, UV ARC and who was associated with drafting of the 2011 KAG report.


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