RBI panel on ARCs

In News

• 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. 

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.

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