The RBI panel makes a multitude of suggestions to streamline the operation of CRAs

In an effort to streamline the operation of Asset Reconstruction Companies (ARCs), a Reserve Bank committee made a host of suggestions, including the creation of an online platform for the sale of assets in difficulty and allowing ARCs to act as resolution seekers during the IBC. to treat.

The committee, headed by former RBI Executive Director Sudarshan Sen, suggested that the scope of Article 5 of the SARFAESI Act be broadened to allow CRAs to acquire financial assets from all financial institutions. regulated entities, including AIFs, REITs, AMCs investing on behalf of FMs and all NBFCs, including HFCs.

The performance of ARCs has so far remained poor, both in terms of recovery and business recovery. Banks and other investors were only able to recover about 14.29% of the amount owed by borrowers for stressed assets sold to CRAs during the period 2004-2013.

Likewise, data shows that 80 percent of the turnaround made by the CRAs is the result of deploying reconstruction measures that don’t necessarily lead to business revival.

In order to improve the performance of the CRAs, the RBI had appointed the committee to review the issues and recommend appropriate measures to enable the CRAs to meet the growing demands of the financial sector. Stakeholders can send their comments on the report to the RBI by December 15.

The committee recommended that for all accounts over Rs 500 crore, two external appraisers approved by the bank conduct an appraisal to determine the liquidation value and the fair market value. In case of accounts between Rs 100 crore and Rs 500 crore, an appraiser may be engaged.

“In addition, final approval of the reserve price should be given by a high-level committee that has the power to approve the corresponding loan cancellation,” the report said.

The reserve price plays an essential role in ensuring true price discovery in auctions conducted for the sale of stressed assets.

The report also recommended that the minimum Net Ownership Fund (NOF) requirement for CRAs be increased to Rs 200 crore, with existing CRAs being eligible for a descent trajectory to meet this requirement.

The report also suggested that with regard to the taxation of income generated by investing in SRs (security receipts) issued by ARCs, the possibility of a “transfer” regime for AIF investors could be reviewed by the Central Council for Direct Taxes. (CBDT). The committee also recommended that the CBDT consider clarifying the tax rate applicable to REITs.

He further stated that given the limitation of traditional sources of funding for the resolution of distressed assets, ARCs should be allowed to sponsor a Sebi registered AIF, to be used as an additional vehicle to facilitate restructuring / recovery. debt. acquired by the ARC and a significant turnaround by the borrower.

Another important recommendation is that if 66% of lenders (by value) decide to accept an offer from an ARC, the same can be binding on all lenders and must be implemented within 60 days of approval. by majority lenders (66%). In addition, 100% provisioning on the outstanding loan should be mandatory for a dissident lender who does not meet this requirement.

The detailed report further suggests that in order to enhance the ability of CRAs to be a primary resolution vehicle, they may be allowed to participate in the IBC as a resolution requester either through their SR trust or through the AIF sponsored by them.

He also recommended broadening the investor base of SRs. He said the list of eligible qualified buyers could be expanded to include HNIs with a minimum investment of Rs 1 crore, businesses (net worth – Rs 10 crore and above), trusts, family offices and pension funds. , among others.

The report also talks about the government’s announcement to form an ARC – National Asset Reconstruction Company Limited (NARCL) – to clean the books of public sector banks.

“Regarding the NARCL proposed by the Indian government to clean the books of PSBs, the RBI should ensure fair competition between NARCL and private ARCs to promote the objectives of true price discovery through the market mechanism,” did he declare.

The report notes that the overall performance of the ARC Sector leaves a lot to be desired. However, it would be wrong to assume that the problems of the ARC sector are entirely of its own making. Aging NPAs before they are sold can contribute to poor recovery.

(Only the title and image of this report may have been reworked by Business Standard staff; the rest of the content is automatically generated from a syndicated feed.)

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