bad loans: RBI may set up task force soon: Rules for ARCs likely to be reviewed – The Economic Times

Clipped from: https://economictimes.indiatimes.com/industry/banking/finance/rules-for-arcs-likely-to-be-reviewed/articleshow/81904479.cmsSynopsis

The move could involve examining proposals like weaving the role of ARCs in the insolvency and bankruptcy code, letting them join hands with private equity and venture capital funds to recapitalise and ensure turnaround of a defaulting company, and making the provisioning levels by banks following sale of bad loans to an ARC more realistic.

In a move to activate the struggling market for bad loans, the rules for asset reconstruction companies (ARCs), which buy sticky assets from banks, may be revisited.

The move could involve examining proposals like weaving the role of ARCs in the insolvency and bankruptcy code, letting them join hands with private equity and venture capital funds to recapitalise and ensure turnaround of a defaulting company, and making the provisioning levels by banks following sale of bad loans to an ARC more realistic.

The Reserve Bank of India (RBI) may set up a task force comprising industry veterans and experts to review the regulations which have not changed for years, sources told ET. An RBI spokesman did not comment on the matter.

“ARCs were derived from Sarfaesi, and came into existence before the insolvency and before the IBC. Probably, it’s time to examine whether a well-capitalised ARC, having a good track record can offer a resolution proposal to revive the company, whether this can happen in a transparent way under certain conditions put down by the regulator which is understandably sceptical of a thinly capitalised ARC bidding for a large company. Here, the question crops up whether such an ARC is a front for someone else,” said a person familiar with the industry. An ARC under the present regulatory regime cannot be a resolution applicant.

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The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (Sarfaesi) Act, 2002, allows banks and other financial institutions to auction defaulters’ properties to recover loans.

Stricter Provisioning Norms Hit Deals
“If an ARC, ties up with an alternative investment fund (AIFs such PE or VCs) to arrange finance for reviving a company through equity infusion, or acts as a sponsor in an AIF, then its investment commitment would be lower than 15% cash as required under the current rules. That could help in more (loan sale) transactions between banks and ARCs,” said a source.

According to the rules, an ARC must pay a minimum 15% of the deal value in cash and the balance as ‘security receipts’ (SRs) which are similar to seven-year bonds. Say, a Rs 100 crore loan that is categorised as NPA and on which the lending bank has made provisioning of Rs 30 crore, recording the loan net of provisioning at Rs 70 crore; an ARC that buys that loan at Rs 40 crore, pays Rs 6 crore (15% of Rs 40 crore) as cash and the balance Rs 34 crore as SRs. Here, the bank has to further provide Rs 30 crore (the difference between Rs 70 crore and Rs 30 crore) and make incremental provisioning on SRs.

“The provisioning rules were tightened some years ago in a way as if the loan, even after it is sold, continues to be an asset in the books of banks. This is one of the reasons, along with the differences over valuations, why deals between banks and ARCs have slowed down,” said another person.

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