Asset Reconstruction Companies (ARCs)

The Reserve Bank of India (RBI) has introduced significant changes to the regulatory framework for Asset Reconstruction Companies (ARCs) with the updated “Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024,” issued on April 24, 2024. These amendments are aimed at enhancing operational efficiency and expediting the resolution of retail non-performing assets (NPAs).

Key Points:

• Simplified Approval Process for Retail NPAs:
  • Settlement of dues with a principal outstanding of ₹1 crore or less will no longer require approval from an Independent Advisory Committee (IAC).
  • These cases can now be approved by a competent authority set up under a board-approved policy, significantly reducing procedural delays.
• Continued Oversight for Larger Exposures:
  • Settlement cases involving dues exceeding ₹1 crore will still require IAC approval to ensure due diligence.
  • The IAC must comprise experts with technical, financial, or legal expertise to evaluate the borrower’s financial position, projected earnings, and recovery prospects.
• Enhanced Governance:
  • The ARC’s board of directors, which must include at least two independent directors, will review the IAC’s recommendations and assess alternative recovery strategies.
  • Decisions made by the board must be thoroughly documented, along with the rationale, in the meeting minutes.
• Comprehensive Policy Framework:
  • ARCs must establish a detailed policy addressing:
    • Eligibility criteria for one-time settlements.
    • Permissible compromises or sacrifices based on the size of exposure.
    • Methodologies for determining the realizable value of securities.
• Encouragement to Acquire Retail NPAs:
  • The revised rules aim to incentivize ARCs to acquire and resolve smaller retail loans, which can lead to better recovery rates and a cleaner financial system.

About ARCs:

• ARCs are registered and regulated by the RBI under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act, 2002).
• They play a critical role in managing and resolving stressed assets, thereby supporting the stability of the financial ecosystem.

(Source: Financial Express)