ARC route being misused by “tainted” promoters: RBI deputy governor Rao

Mumbai: Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao has expressed concerns over “tainted” promoters misusing the asset reconstruction companies (ARC) route to enter the bankruptcy proceedings and stressed for improving governance practices such firms. The credit life cycle involves four distinct stages — sourcing of credit proposal; appraisal and underwriting; disbursal and monitoring; and, repayment, which then starts off the next iteration of the credit cycle.

“If, however, for some reason, the borrower does not pay the dues on time and a loan does not enter the fourth stage, there could be a problem. ARCs have been institutionalised to play a crucial role at this juncture,” Rao said.

Speaking at a conference on ‘Governance in ARCs — Towards Effective Resolutions’ earlier this month, he said ARCs are the institutions to enable loan originators to focus on their core function of lending by taking over stressed financial assets.

The ARC framework is also designed to help borrowers revive their businesses, if possible.

This in some ways is also intended to preserve the productive asset generated out of the loan, Rao said.

Referring to the issue of resolution of the acquired assets, the deputy governor said there is a regulatory framework in place, under the provisions of SARFAESI Act, which enables ARCs to undertake resolution. “However, there are concerns around activities in this process chiefly relating to the ARC route becoming a vehicle for entry of the ‘tainted’ promoters, who in the first place were responsible for the default of the underlying entity,” he said. This aspect, he further said, has become relevant since the introduction of Section 29A in the Insolvency and Bankruptcy Code (IBC), which was specifically meant to keep out such promoters.

“However, often, entities meet this requirement by merely obtaining a declaration signed by the perspective buyer without undertaking any independent verification,” he added.

Rao stressed that asked the leaders of the ARC sector to ensure that the sector remains focused on course charted through legislative and regulatory intent and should ensure that any negative perception about the functioning and governance standards of the ARCs is dispelled.

“To achieve that, it is important that ARCs have strong governance frameworks, robust internal controls, well developed risk management function, and strong compliance culture,” he said.

As a regulator, the RBI’s efforts will be to smoothen the operational difficulties and support the growth of the ecosystem for faster and efficient resolution of stressed assets, the deputy governor said.