RBI issues Master Direction for Asset
Reconstruction Companies
The
Reserve Bank of India (RBI) has issued Master Direction to the Asset
Reconstruction Companies. An Asset Reconstruction Company (ARC) is a financial
institution that buys the Non Performing Assets (NPA)
or bad assets from banks and financial institutions so that the latter can
clean up their balance sheets.
"ARCs play a critical role in the resolution of stressed
financial assets of banks and financial institutions, thereby enhancing the
overall health of the financial system. To ensure prudent and efficient
functioning of ARCs and to protect the interest of
investors, Reserve Bank of India hereby issues the Master Direction - Reserve
Bank of India (Asset Reconstruction companies) Directions, 2024" said a release
by the RBI.
According
to the directions, to commence the business of securitisation
or asset reconstruction, an ARC is required to have a minimum net owned fund
(NOF) of Rs 300 crore and
thereafter, on an ongoing basis.
Additionally,
before commencing the business of securitisation or
asset reconstruction, an ARC shall apply for registration and obtain a certificate
of registration (CoR) from the RBI.
The
directions also state that no ARC shall invest in land or building, except for
investment for its own use up to 10% of its owned funds.
Furthermore,
ARCs are prohibited from raising money by way of
deposit. They are also mandated to maintain a capital adequacy ratio of a
minimum of 15% of its total risk-weighted assets.
Regarding
leadership positions, the directions specify that no person shall continue as
MD/ CEO or Whole-time Director (WTD) beyond the age of
70 years. Additionally, the tenure of MD/ CEO or WTD
shall not exceed five years at a time, with a maximum tenure of fifteen years
continuously.
Moreover,
ARCs are required to report to the Indian Banks
Association (IBA) the details of chartered accountants,
advocates, and valuers who have committed serious
irregularities in the course of rendering their professional services for
inclusion in the IBA database of third-party entities
involved in fraud.
These
directions aim to streamline and regulate the functioning of Asset
Reconstruction Companies in India, ensuring transparency, accountability, and
integrity in the financial system.
In
the Union Budget 2021-22, Finance Minister Nirmala Sitharaman announced the setting up of Asset Reconstruction
Companies in India to take care of Non-Performing Assets (NPAs)
of stressed banks. ARCs in India has been set up by state-owned and private-sector
banks. Also, there is no equity contribution from the government.
ARCs help banks clean up their balance sheets by acquiring financial
assets from banks and financial institutions through auctions or bilateral
negotiations. They securitize and reconstruct the assets to bring liquidity
into the system.
www.economicstimes.com dt. 25.04.2024