The Reserve Bank of India (RBI) has revised the Master Direction – Reserve Bank of India (Asset Reconstruction Companies-ARCs) Directions, 2024.
About ARCs
- ARCs are financial institutions specializing in buying Non-Performing Assets (NPAs) from banks or financial institutions.
- The primary objective is to recover the debts or associated securities, either directly or indirectly.
- The concept was proposed by the Narasimham Committee II (1998), leading to their establishment under the SARFAESI Act, 2002.
- ARCs play a crucial role in improving the financial health of banks by removing bad loans from their books.
Registration and Regulation
- ARCs are registered under the Companies Act, 2013.
- Additionally, they must register with the RBI under Section 3 of the SARFAESI Act, 2002.
Working Mechanism
Asset Reconstruction
- ARCs acquire rights in loans, advances, or other credit facilities to recover amounts owed.
Securitization
- They issue security receipts (SRs) to Qualified Buyers (QBs) after acquiring financial assets.
- QBs include banks, insurance companies, state financial corporations, ARCs, or SEBI-registered asset management firms.
Security Receipts (SRs)
- ARCs issue SRs, which are redeemed upon recovery of the acquired loan.
- Management fees and recovery gains are shared with the selling financial institution.
Key Points of the RBI’s Revised Master Direction on ARCs
- Board-Approved Policy
- ARCs are required to create a policy approved by their board that covers:
- Cut-off date for eligibility for one-time settlement.
- Permissible sacrifice criteria for different borrower categories when deciding the settlement amount.
- Methodology for assessing the realizable value of the underlying security.
- Settlement Process
- Settlements should be considered only after all recovery avenues have been fully explored.
- Lump-sum payments are preferred for settlement amounts.
- If a lump-sum payment is not feasible, payment plans must align with the ARC’s business model, the borrower’s cash flows, and projected earnings.
- Independent Advisory Committee (IAC)
- ARCs must set up an IAC comprising technical, financial, or legal experts.
- The IAC will review settlement proposals and provide recommendations to the ARC’s board committee.
These revised directions aim to:
- Foster operational efficiency and adherence to best practices by ARCs.
- Strengthen accountability and transparency in the settlement process.
- Enhance the stability of the financial sector by resolving NPAs more effectively.
