ARC chiefs to meet RBI deputy guvs for seeking clarity on bank borrowing

The Reserve Bank of India (RBI) will meet top executives of asset reconstruction companies (ARCs) on Friday to take stock of the sector.

During the meeting, ARCs will also seek clarity from the regulator on bank borrowing.

While there is no regulatory ban in place, ARC sources said banks often refuse funding.

“If the regulator clarifies that commercial banks are allowed to lend to the ARCs, it will help,” a top ARC official said.

Apart from bank funding, ARCs raise funds from the market by way of non-convertible debentures.

The other issue faced by the ARCs is the settlement process.

According to the current norms, every settlement proposal for an ARC has to go through an independent advisory committee consisting three officials from finance, technical, and legal backgrounds, even for a nominal amount.

In addition, all settlement proposals need to be approved at the board level.

“For other regulated entities like banks or NBFCs, there is a settlement policy with the delegation of power.

“Settlements can be done at the branch level, regional, and office level.

“That is not the case with ARCs.

“This makes the settlement mechanism time-consuming,” an official from an ARC, adding the issue is likely to be raised with the regulator.

The banking regulator has been meeting chief executives of regulated entities like banks, NBFCs, and cooperative banks as a part of their supervisory engagements to understand the issues faced by entities and also convey its message to the regulated entities.

Governance has been a key theme of these interactions with regulated entities.

RBI deputy governors from regulation and supervision will be having the interaction with the ARC CEOs, along with executive directors.

More participation from the retail investors is another issue that may be raised with the regulator, ARC officials said.

Increased participants in the security receipts market will also ensure depth and liquidity.

“Only a few investors are eligible for investment in security receipts.

“We would request the regulator to implement the Sudarshan Sen committee recommendation which proposed that high net-worth individuals should be eligible to invest in SRs,” an official said.

When an ARC buys an asset from a bank or NBFC, they pay 15 per cent in cash and 85 per cent in the form of security receipts.

RBI formed a committee under Sudarshan Sen to review the legal and regulatory framework for ARC.

The committee, which submitted its report in November 2021, recognised that the listing and trading of SRs will take off only if ARCs’ ability to resolve the underlying stressed assets is strengthened to generate a higher quantum of redemption and upside for an investor.

The committee recommended the list of eligible qualified buyers could be further expanded to include HNIs with a minimum investment of Rs 1 crore, and corporates (net worth of Rs 10 crore & above), among others.

According to RBI data, sales to ARCs by banks shot up in 2022-23, partly reflecting the assets sold to the newly operationalised National Assets Reconstruction Company Ltd.

During 2022-23, 9.7 per cent of the previous year’s stock of scheduled commercial banks’ Gross NPAs was sold to ARCs as compared with only 3.2 per cent in 2021-22.

The acquisition cost of ARCs as a proportion to book values of assets declined from 33 per cent at the end of March 2022 to 29.8 per cent at the end of March 2023, the RBI added.

Key issues faced by ARCs

• No regulatory bar on bank borrowing by ARCs. Sources say banks often refuse funding to such entities
• The cumbersome process for settlement: In current norms, every settlement proposal for an ARC has to go through an independent advisory committee consisting of 3 officials, even for small amounts
• More participation from the retail investors: Increased participants in the security receipts market can help ensure depth and liquidity