Mumbai: The Reserve Bank of India (RBI) will constitute a committee to review the working of asset reconstruction companies (ARCs) to help them realize their full potential, governor Shaktikanta Das said on Wednesday.

“Asset reconstruction companies play an important role in the resolution of stressed assets. Their potential however is yet to be fully realized. It is therefore 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,” said Das.

RBI’s concerns of unrealized potential seem to have stemmed from the fact that extant regulations are not conducive for ARC participation as equity buyers in stressed companies under insolvency proceedings. Lenders sell stressed loans to ARCs at a discount, either in exchange of cash or a mix of cash and security receipts. These receipts are redeemable as and when the ARC recovers the specific loan.

Last year, the central bank had rejected a resolution plan submitted by UV Asset Reconstruction Co Ltd for acquiring assets of Aircel citing that the plan does not conform to Sarfaesi Act guidelines. Under RBI guidelines in force since 2017, ARCs can hold more than 26% equity in a borrower after debt-to-equity conversion if they meet certain norms. The UV ARC resolution plan involved the ARC getting 76% stake in the company in the first five years, with the financial creditors getting the rest. Following this, the ARC association and lenders like State Bank of India (SBI) sought clarifications from RBI on the involvement of ARCs in resolution plans under the Insolvency and Bankruptcy Code (IBC).

Mint reported on 26 September that RBI has decided not to approve bankruptcy resolution plans submitted by asset reconstruction companies. However, ARCs can instead purchase the debt of the stressed accounts from banks and participate as a creditor under IBC.

Since issuance of ARC guidelines in 2003, while ARCs have grown in number and size, their potential for resolving stressed assets is yet to be realized fully, RBI said in a statement on Wednesday.

That apart, the government has also decided to create an ARC that will buy stressed debt from banks and is expected to manage soured loans of over 2 trillion. As announced in the Union Budget on 1 February, the government wants to create a structure to house bad loans of 500 crore and above and will have an asset reconstruction company and an asset management company (AMC) to manage and recover such bad assets. The formation of the committee, therefore, comes at a crucial time when bad loans are expected to surge and asset turnaround companies like ARCs will be in much demand.

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