Lacklustre Performance by ARCs as Lenders Could Recover Just 14.29%: RBI Committee
IANS 03 November 2021
Multiple factors have led to sub-optimal performance of the asset reconstruction companies (ARCs) in the country, said the Reserve Bank of India (RBI) Committee.
The ARC framework was designed to allow originators to focus on their core function of lending, by removing sticky stressed financial assets from their books.
It was also designed to help borrowers revive their businesses which protects the viable and productive assets of the economy and often ensures a better return to banks and financial institutions (FIs).
Accordingly, the committee constituted to Review the working of ARCs said, "multiple factors behind the sub-optimal performance of the sector such as vintage NPAs being passed on to ARCs, lack of debt aggregation, non-availability of additional funding for stressed borrowers, difficulty in raising of funds by the ARCs on their balance sheet, among others."
"Also, ARCs have lacked focus on both recovery and acquiring necessary skill sets for holistic resolution of distressed borrowers."
RBI Committee cited data which showed that the performance of the ARCs has been lacklustre, both in terms of ensuring recovery and revival of businesses.
"Banks and other investors could recover only about 14.29% of the amount owed by borrowers in respect of stressed assets sold to ARCs during the FY2004-2013 period."
"Similarly, data shows that approximately 80% of the recovery made by ARCs has come through deployment of measures of reconstruction that do not necessarily lead to revival of businesses."
Considering the challenges impacting the performance of the ARC sector, the committee recommended sale of stressed assets by lenders at an earlier stage to allow for optimal recovery by ARCs.
"In this respect, the Committee highlights the need for regulatory clarification on sale of all categories of special mention accounts (SMAs) to ARCs."
"Further, as a measure to incentivise lenders to sell their financial assets to ARCs at an early stage of stress, the committee recommends a dispensation to lenders, on an ongoing basis, to amortise the loss on sale, if any, over a period of two years."
Besides, it called for a higher threshold of investment in SRs by lenders below which provisioning on SRs held by them may be done on the basis of net asset value (NAV) declared by the ARC instead of the IRACP norms.
In addition, the committee, among other measures, recommended the creation of an online platform for sale of stressed assets.
"Infrastructure created by the Secondary Loan Market Association (SLMA) may be utilised for this purpose."
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