The Reserve Bank raised the minimum capital requirement for setting up an asset reconstruction company (ARC) to Rs 300 crore from the existing Rs 100 crore with an aim to strengthen the securitisation sector which plays a vital role in the management of distressed financial assets.
What Are ARCs:
An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the latter can clean up their balance sheets. Or in other words, ARCs are in the business of buying bad loans from banks. ARCs clean up the balance sheets of banks when the latter sells these to the ARCs. This helps banks to concentrate in normal banking activities. Banks rather than going after the defaulters by wasting their time and effort, can sell the bad assets to the ARCs at a mutually agreed value.
What The RBI Said:
The existing ARCs have been given a glide path to meet the minimum net owned fund (NOF) requirement till April 2026, the RBI said in a circular amending the existing regulatory framework for such entities. “Consequently, any ARC obtaining the certificate of registration on or after the date of this circular shall not commence the business of securitisation or asset reconstruction without having minimum NOF of Rs 300 crore,” the circular said, adding the guidelines are effective immediately.
The Evolution Of Regulation Of ARCs:
Under the earlier guidelines, each ARC was required to frame a board-approved policy laying down the broad parameters for settlement of debts due from the borrowers. Further, the board was permitted to delegate powers to a committee comprising any director and/or functionaries of the ARC for taking decisions on the proposals for settlement of dues.
Upon review, the RBI said the guidelines for the reconstruction of financial assets through settlement of dues payable by the borrowers have been modified. “Settlement of dues with the borrower shall be done only after the proposal is examined by an Independent Advisory Committee (IAC) which shall consist of professionals having technical/ finance/ legal background,” it said.
ARCs will have to constitute an audit committee of the board comprising of non-executive directors only. Earlier, the central bank had set up a committee to undertake a comprehensive review of the working of ARCs and recommend suitable measures for enabling them to function in a more transparent and efficient manner. The regulatory framework for ARCs has been amended based on the committee’s recommendations and feedback from stakeholders, the RBI said.