Despite numerous regulatory interventions and growing evidence of the relevance of asset reconstruction companies, there is much ground to cover in India’s distressed assets space
Asset reconstruction companies (ARCs), that were formed under the SARFAESI Act to help banks manage and recover bad loans, have sprung back into focus after the RBI’s recent directive and the Supreme Court ruling in the Essar Steel case. While the former ensures more transparency in the sale of bad loans by banks to ARCs, the latter highlights how ARCs can help ease banks’ burden. The RBI’s recent notification — disallowing ARCs from buying bad loans bilaterally from banks or financial institutions which are the sponsors of/lenders to the ARC, or part of the same group — is imperative to ensure that there is ‘true sale’ of assets. Given that banks stopped recording assets sold to ARCs as bad loans in their books, it is important that banks do not use the ARC tool to evergreen their balance sheets. At the same time, the successful resolution of Essar Steel brings to light the importance of having an efficient ARC structure in place.