Asset reconstruction companies can now acquire financial assets of peers

The Reserve Bank of India (RBI) has allowed asset reconstruction companies (ARCs) to acquire financial assets from other ARCs in a bid to accelerate timely resolution of stressed assets.

Earlier, ARCs could acquire financial assets from other ARCs only when they had some exposure to the asset that was being bought. Thus, the acquisition was “limited to aggregating and be in a better position to resolve stressed assets”, said a senior executive with a foreign-owned ARC said.

Those with access to bigger amounts (funds) and endowed with skills to tackle complex assets will be in a position to buy out exposure from fellow ARCs. This would help quicken the resolution process in a system that is saddled with huge pile of stressed loans, said the chief of a small ARC.

The RBI’s move follows amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.

But the ARCs have to follow certain conditions while acquiring assets, the RBI said in a communication. The transaction should be settled on a cash basis. The price discovery for such a transaction should not be prejudicial to the interest of security receipt holders, it added.

The selling ARC should use the proceeds for the redemption of underlying security receipts.

The date of redemption of security receipts and the period of realisation shall not extend beyond eight years from the date of acquisition of the financial asset by the first ARC, the RBI said.

The country’s banking system, with a huge pile of stressed assets, has provided a huge business opportunity for ARCs in India.

The primary reasons for a spurt in stressed assets include aggressive lending practices, willful default, loan frauds, corruption, and economic slowdown.

Private banks have been the most aggressive on asset sales. Public sector banks lagged in this, mainly owing to large haircuts and various management issues.