Norms tightened for asset reconstruction companies

RBI has said ARCs would get up to 6 months to plan recoveries from the non-performing assets acquired

Pushing for sweeping changes in the asset reconstruction segment, the Reserve Bank of India (RBI) has tightened norms for these companies to improve discipline and bring about transparency in the sale and purchase of bad loans.

Now, asset reconstruction companies (ARCs) will have to pay upfront 15 per cent of the bid value of non-performing loans, against five per cent earlier. Also, those planning to buy bad loans will get more time (at least two weeks) to carry out due diligence before bidding for stressed assets. So far, banks have enjoyed complete discretion in deciding the timeframe for due diligence.

Bankers and senior ARC executives said a slew of modifications in directives would make these companies go back to the drawing board for raising capital and resolution strategies for recoveries. Banks will have to fix reserve prices reasonably.

RBI said ARCs would get up to six months to plan recoveries from the non-performing assets acquired. Currently, ARCs get about a year for this.

On the valuation of securities receipts, RBI said the initial valuation of these receipts should be carried out within six months of acquiring the asset, instead of the current one year. It said the management fees charged by ARCs should be calculated and charged as percentage of the net asset value, adding these shouldn’t be linked to the outstanding value of securities receipts. ARCs will become members of a joint lenders’ forum for stressed assets and put up on their websites a list of wilful defaulters at quarterly intervals.

Hari Hara Mishra, president and chief operating officer of UV Asset Reconstruction, said these measures would go a long way in addressing market imperfections, bringing about more transparency and formalising effective role-play for ARCs.

Now, these companies will be empowered to report to Indian Banks’ Association (IBA) details of recalcitrant chartered accountants, advocates and valuers resorting to irregularities. These details are placed on the IBA database of third-party entities involved in fraud.

ARCs will have to mandatorily disclose the basis of valuations in case the acquisition value of assets is more than the book value. They will also have to disclose the details of the assets disposed of at substantial discount during a year and the reasons for this.