Skip to main content

What is regulatory framework for Asset Reconstruction Companies (ARCs)?

Reserve Bank of India (RBI) has recently amended the regulatory framework for Asset Reconstruction Companies (ARCs).

What are Asset Reconstruction Companies (ARCs)?

Asset Reconstruction Companies (ARCs) acquire the non-performing assets (NPAs) from banks or financial institutions along with the underlying securities mortgaged and / or hypothecated by the borrowers to the lenders. The ARCs then try and manage or resolve these NPAs acquired from banks or financial institutions. 

What is the basis for amendment in regulatory framework of ARC?

In April 2021, Reserve Bank of India (RBI) had constituted a Committee (Chairman: Shri Sudarshan Sen, former Executive Director, RBI) to undertake a comprehensive review of the working of ARCs in the financial sector ecosystem and recommend suitable measures for enabling such entities to meet the growing requirements of the financial sector. 

Based on the Committee’s recommendations and feedback from the stakeholders, the regulatory framework for ARCs has been amended by RBI.

What is the deadline for complying with the Guidelines?

ARCs are required to comply with the guidelines within 6 months from the date of the guidelines (October 11, 2022).

What are Minimum Net Owned Fund (NOF) requirements for ARCs?

Current Minimum NOF Existing ARCs New ARCs
By March 31, 2024 By March 31, 2026
₹100 crore ₹200 crore ₹300 crore ₹300 crore

Which loans can be transferred to ARCs?

Stressed loans which are in default in the books of the transferors are permitted to be transferred to ARCs.

What are the measures to enhance governance of ARCs?

  • The Chair of the Board shall be an independent director.
  • The quorum for the Board meetings shall be 1/3rd of the total strength of the Board or 3 directors, whichever is higher. Further, at least half of the directors attending the meetings of the Board shall be independent directors.
  • Tenure of Managing Director (MD) / Chief Executive Officer (CEO) or Whole -time Directors (WTDs) shall not be for more than 5 years at a time and the individual shall be eligible for re-appointment. However, the post of the MD / CEO or WTD shall not be held by the same incumbent for more than 15 years continuously. Thereafter, the individual shall be eligible for re-appointment as MD / CEO or WTD in the same ARC, after a minimum gap of 3 years. During this 3-year cooling period, the individual shall not be appointed or associated with the ARC in any capacity, either directly or indirectly. 
  • No person shall continue as MD / CEO or WTD beyond the age of 70 years. 
  • The performance of MD / CEO and WTD shall be reviewed by the Board annually.

Which committees shall be constituted by ARCs?

ARCs shall constitute the following committees of the Board –

Audit Committee

  • shall comprise of non-executive directors only. 
  • shall meet at least once in a quarter with a quorum of 3 members.
  • shall ensure that accounting of management fee / incentives / expenses is in compliance with the applicable regulations.

Nomination and Remuneration Committee – shall ensure 'fit and proper' status of proposed / existing directors and sponsors.

When is prior approval of RBI required?

ARCs are required to obtain prior approval of RBI for –

  • Change in shareholding on account of transfer of shares. 
  • Change in the sponsors of an ARC due to fresh issuance of shares.
  • Appointment / re-appointment of a director or MD / CEO.  

Which additional disclosures are to be made by ARCs?

The following additional disclosures are to be made by ARCs in the offer document –

  • Summary of financial information of the ARC for last 5 years or since commencement of business of the ARC, whichever is shorter.
  • Track record of returns generated for all Security Receipt (SR) investors on the schemes floated in the last 8 years.
  • Track record of recovery rating migration and engagement with rating agency of schemes floated in the last 8 years.

What are the requirements regarding credit rating?

  • ARCs shall mandatorily obtain recovery rating of the SRs from Credit Rating Agencies (CRAs) and disclose the assumptions and rationale behind such rating to SR holders.
  • ARCs shall retain a CRA for at least 6 rating cycles (of half year each). If a CRA is changed mid-way through these 6 rating cycles, the ARC shall disclose the reason for such change.

What are instructions on settlement of dues payable by borrowers under One-time Settlement?

  • Settlement of dues with the borrower shall be done only after the proposal is examined by an Independent Advisory Committee (IAC). 
  • The Board of Directors including at least 3 independent directors shall deliberate on the recommendations of IAC.
  • Settlement with the borrower should be done only after all possible steps to recover the dues have been taken and there are no further prospects of recovering the debt.
  • The Net Present Value (NPV) of the settlement amount should generally be not less than the realizable value of securities. If there is a significant variation between the valuation of securities recorded at the time of acquisition of financial assets and the realisable value assessed at the time of entering into a settlement, reasons thereof shall be duly recorded.
  • The settlement amount should preferably be paid in lump sum. In cases where the borrower is unable to pay the entire amount in lump sum, IAC shall make specific recommendations about minimum upfront lump-sum payment and maximum repayment period.

What are other guidelines for ARCs?

  • In addition to the avenues already permitted, ARCs are now permitted to deploy the available surplus funds in short-term instruments viz., money market mutual funds, certificates of deposit and corporate bonds / commercial papers which have a short-term rating equivalent to the long-term rating of AA- or above by an eligible CRA, up to 10% of the NOF of the ARC.
  • ARCs shall, by transferring funds, invest in the SRs at a minimum of either 15% of the transferors’ investment in the SRs or 2.5% of the total SRs issued, whichever is higher, of each class of SRs issued by them under each scheme on an ongoing basis till the redemption of all the SRs issued under such scheme.
  • ARCs (with minimum NOF of ₹1,000 crore) are now permitted to undertake the activities, which are not specifically allowed under the SARFAESI Act, as a Resolution Applicant (RA) under IBC. 


References

Reserve Bank of India. (2022, October 11). 'Review of Regulatory Framework for Asset Reconstruction Companies (ARCs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12399&Mode=0


Follow at - Telegram   Instagram   LinkedIn   Twitter

Labels:

Comments

Post a Comment

Popular Posts

Report of the Committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector

Reserve Bank of India (RBI) has released the report of the committee to develop a framework for responsible and ethical enablement of artificial intelligence (FREE-AI) in the financial sector. Committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector In the financial sector, Artificial Intelligence (AI) has the potential to unlock new forms of customer engagement, enable alternate approaches to credit assessment, risk monitoring, fraud detection, and offer new supervisory tools. At the same time, increased adoption of AI could lead to new risks like bias and lack of explainability, as well as amplifying existing challenges to data protection, cybersecurity, among others. To encourage the responsible and ethical adoption of AI in the financial sector, the committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector (Chairperson: Dr. Pushpak B...
Post a Comment
Read more

Lending against Gold and Silver collateral

Reserve Bank of India (RBI) has issued directions on lending against the collateral of gold and silver. To whom are the directions applicable? The directions are applicable to the following regulated entities (REs) – Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks, but excluding Payments Banks). Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks (RCBs), i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs). Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs). Which loans are covered under the directions? The directions shall apply to all loans offered by an RE for the purpose of consumption or income generation (including farm credit) where eligible gold or silver collateral is accepted as a collateral security. What is eligible collateral? Eligible collateral means the collateral of jewellery, ornaments or coins made of gold or silver. A lender shall not grant any ad...
Post a Comment
Read more

All about RBI Integrated Ombudsman Scheme, 2021

Filed a complaint against a bank / financial institution but haven’t received a reply for more 30 days? Or received a reply but not satisfied with the resolution offered by the bank / financial institution? Or the complaint was rejected by the bank / financial institution? You can approach RBI Ombudsman under the RBI Integrated Ombudsman Scheme, 2021. What is RBI Integrated Ombudsman Scheme (RBI-IOS), 2021? RBI-IOS was launched on November 12, 2021, by integrating the existing 3 Ombudsman schemes of RBI. RBI-IOS adopts ‘One Nation One Ombudsman’ approach by making the RBI Ombudsman mechanism jurisdiction neutral. It provides cost-free redress of customer complaints involving deficiency in services rendered by entities regulated by RBI. Which schemes are integrated in RBI-IOS? RBI-IOS integrates following existing schemes of RBI – Schemes Powers derived from Entities covered Banking Ombudsman Scheme, 2006 Section 35A of BR Act, 1949 S...
Post a Comment
Read more

Investments in Debt Instruments by Non-residents

Reserve Bank of India (RBI) has issued directions on investments in debt instruments by non-residents. What are the channels for investments in debt instruments by non-residents? General Route – for investment in Government securities and corporate debt securities by Foreign Portfolio Investors (FPIs) subject to specified investment limits and macro-prudential limits. Voluntary Retention Route (VRR) – for investments in Government securities and corporate debt securities, free of certain macro-prudential limits applicable to FPI investments in debt markets under the General Route, by FPIs that commit to remain invested for a stipulated retention period. Fully Accessible Route (FAR) – for investments by non-residents in certain specified categories of Central Government securities (‘specified securities’) without any restriction. Scheme for Trading and Settlement of Sovereign Green Bonds (SGrBs) issued by the Central Government by eligible foreign investors in the International Finan...
Post a Comment
Read more

Continuous Clearing and Settlement on Realisation in Cheque Truncation System (CTS)

Reserve Bank of India (RBI) has issued direction on continuous clearing and settlement on realisation in Cheque Truncation System (CTS). What is Cheque Truncation System (CTS)? Cheque Truncation System (CTS) involves halting the physical movement of the cheque and its replacement by images of the instrument and the corresponding data contained in the MICR line.  In CTS, 3 images are taken of each cheque – front Gray Scale, front Black & White and back Black & White. MICR (Magnetic Ink Character Recognition) is a 9-digit code printed at the bottom of cheques using magnetic ink – first 3 digits indicate City Code, middle 3 digits indicate Bank Code and the last 3 digits indicate Bank Branch Code. Only CTS-2010 standards compliant instruments can be presented for clearing through CTS. The presenting banks which truncates the cheques need to preserve the physical instruments for 10 years. From when will the continuous clearing and settlement on realisation in CTS be implemented...
Post a Comment
Read more