Bank-promoted ARCs can't buy stressed assets from sponsors

While asset sales to asset reconstruction firms were encouraged, RBI laid out norms to ensure transparency in such transactions

The Reserve Bank of India (RBI) has barred asset reconstruction companies (ARCs) from acquiring bad loans from sponsor banks on a bilateral basis. However, it has allowed such transactions if the asset is auctioned in a transparent manner, on an arm’s-length basis and if prices are determined by market factors.

To tackle the increasing number of bad loans, the central bank had unveiled fresh guidelines in January, making the sale of loans to asset reconstruction companies easier. Apart from allowing banks to sell standard assets, the regulator had also allowed them to reverse the excess provision on the sale of bad loans if the sale was for a value higher than the net book value to its profit in the year the amount was received.

While asset sales to ARCs were encouraged, RBI on Wednesday laid out norms to ensure transparency in such transactions. It said promoters of the defaulting company were allowed to buy back their assets from ARCs or securitisation companies if such settlements helped minimise the cost of litigation.

A buyback is allowed if it arrests the impact of a fall in the value of secured assets that are likely to rapidly lose value once a unit becomes non-operational.

The central bank has said the valuation of an asset by an ARC should take into account the current value of the proposed settlement vis-a-vis the net present value of the recoveries under the alternative mode of resolution.

ARCs have also been asked to formulate a policy on stressed asset purchase, to be approved by their boards.