Sell bad debts early, let ARCs take part in IBC: RBI committee

A committee formed by the Reserve Bank of India (RBI) to recommend ways to revive asset reconstruction companies (ARCs) has suggested an early sale of bad debts to them, directly acquiring non-performing assets from the market, and letting ARCs bid in the insolvency and bankruptcy process.

Once an ARC acquires assets, it should be allowed to lend to the stressed assets so that they can be nursed back to health and dues recovered later on.

The committee, headed by former RBI executive director Sudarshan Sen, has suggested in its report that if 66 per cent of the lenders (by value) agree to sell an asset to ARCs, “the same may be binding on the remaining lenders and it must be implemented within 60 days of approval by majority lenders”.

If a lender fails to comply with this requirement, it should be penalised with 100 per cent provisioning on the loan outstanding. The committee said banks more often than not sold vintage loans to ARCs and this made recovery and reviving business difficult.

Banks and other investors could recover only about 14.29 per cent of the amount they lent in respect of stressed assets sold to ARCs between 2003-04 and 2012-13.

About 80 per cent of the recovery ARCs made came through the “deployment of measures of reconstruction that do not necessarily lead to revival of businesses”.

Therefore, banks must aim to sell stressed assets at an early stage while the regulator must clarify on sales of all categories of loans at the special mentioned account (SMA) stage (less than 91 days’ overdue).

Banks’ resolution plans for accounts worth Rs 100 crore in default must include a sale to ARCs as an option. If the NPA is more than two years old, and it is not part of the list identified for sale, banks should document the reason, it said.

Sales of assets to ARCs must be done through an online platform to bring transparency and uniformity in the process, the committee said, suggesting the use of the infrastructure created by the Secondary Loan Market Association (SLMA) for this purpose.

There should be a reserve price for accounts above Rs 500 crore and for all such accounts, two bank-approved external valuers should determine the liquidation value and fair-market value. For accounts between Rs 100 crore and Rs 500 crore, one external valuer will suffice.

“The final approval of the reserve price should be given by a high-level committee that has the power to approve the corresponding write-off of the loan,” the report suggested.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Income Act and other related provisions should be amended to allow ARCs to acquire assets directly from banks and financial institutions, and also from other entities allowed by the RBI.

In cases where ARCs have acquired 66 per cent of the debt of a borrower, the borrower should have two years’ immunity to being proceeded against by other authorities. Government dues, including taxes, cess, etc must be deferred in such cases, the report said.

“The Committee recommends that ARCs may be allowed to participate in the IBC (Insolvency and Bankruptcy Code) process…,” it said. Acquisition should be for reconstruction only.

Importantly, the report suggested ARCs, through alternative investment funds floated by them, “should be allowed to sponsor SEBI-registered AIFs (alternative investment firms) with the objective of using these entities as an additional vehicle for facilitating restructuring/recovery of the debt acquired by them”.