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RBI Policy: To set up panel to review working of asset recast cos

Informist, Wednesday, Apr 7, 2021

 

MUMBAI – The Reserve Bank of India today proposed setting up of a committee to review the working of asset reconstruction companies and suggest measures to realise their full potential in resolution of stressed loans. 


This comes at a time when asset reconstruction companies have sought the central bank's assurance on a level playing field with the government's proposed national asset reconstruction company. The proposed entity, akin to a 'bad bank', would be in addition to the 28 existing asset reconstruction companies.

 

In a statement accompanying the central bank’s Monetary Policy Statement released today, the RBI said since the regulatory guidelines were first issued in 2003, asset reconstruction companies had grown in both number and size, but their potential for resolving stressed assets was yet to be realised fully. 

 

"It is, therefore, proposed to constitute a committee to undertake a comprehensive review of the working of ARCs in the financial sector ecosystem and recommend suitable measures for enabling such entities to meet the growing requirements of the financial sector," the RBI said. 


The Budget for 2021-22 (Apr-Mar) had announced setting up of an asset reconstruction and asset management company to take over the existing stressed assets of banks.


It is popularly referred to as the national asset reconstruction company by banks, as the initiative is led by the government. The structure is yet to be finalised. 


Existing asset reconstruction companies fear that this new entity, backed by capital support from banks, will impact their business and may also get certain regulatory leeway. 


The RBI has already discussed with the parties concerned the issue of conflicts emerging from any preferential treatment, Informist had reported on Mar 22. 


Last month, RBI Governor Shaktikanta Das had also assured that the national asset reconstruction company would not jeopardise the activities of existing asset reconstruction companies, and that the promoters of such companies would have skin in the game.


While the details of the review committee, such as its constitution and terms of reference, are yet to be announced, industry players expect it to focus on pricing and provisioning norms applicable to banks on sale of non-performing assets to asset reconstruction companies. 


From April 2018, banks have had to make provisions for stressed assets that are sold, assuming they remain on the books. This is applicable in cases where security receipts make up for more than 10% in the sale of non-performing assets.


This guideline has led banks to insist on full upfront cash on sale of assets against the earlier 15:85 pricing structure, where banks would get 15% upfront cash and the remaining 85% in the form of security receipts. This had been a negative for existing asset reconstruction companies.  End

 

Reported by Alekh Archana

Edited by Avishek Dutta

 

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