Tag: RESERVE BANK OF INDIA (ASSET RECONSTRUCTION COMPANIES-ARCS) DIRECTIONS

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.

Tag: RESERVE BANK OF INDIA (ASSET RECONSTRUCTION COMPANIES-ARCS) DIRECTIONS

RESERVE BANK OF INDIA (ASSET RECONSTRUCTION COMPANIES-ARCS) DIRECTIONS, 2024

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