The Reserve Bank of India (RBI) Urges Enhanced Governance in Asset Reconstruction Companies

The Reserve Bank of India (RBI) emphasized the importance of enhanced governance, risk management, and compliance by urging greater engagement from the boards of Asset Reconstruction Companies (ARCs). During a recent meeting with ARCs and regulatory representatives, the RBI highlighted numerous instances of non-compliance by these companies, underscoring the necessity of adhering to regulations.

Industry representatives also brought up key challenges troubling the sector. The attendee mentioned that “We discussed the prolonged settlement process with borrowers, which escalates costs, particularly for retail loans”. Additionally, they underscored the difficulty posed by the requirement for ARCs to have ₹1,000 crore in net-owned funds to qualify as a resolution applicant under the Insolvency and Bankruptcy Code, 2016 (IBC).

Net owned funds, akin to net worth, delineate a company’s assets minus its liabilities. In October 2022, the central bank issued guidelines mandating ARCs to conduct a background check on borrowers through an independent advisory committee. This committee evaluates a borrower’s financial situation before proposing a settlement, which the board of directors, inclusive of at least two independent members, then assesses to determine the optimal course of action for the recovery agency.

The Corporate Governance Norms for Asset Reconstruction Companies issued by RBI vide notification dated 11.10.2022:

• Increase in Net Owned Funds
• Business Profile Enhancements
• Investments in Security Receipts (SRs)
• Benefits of Revised Minimum Investment in SRs
• Participation as Resolution Applicants in IBC
• Governance Framework Strengthening
• Enhanced Disclosure Norms
• Supervisory Actions for Non-Compliance
• Expanded Role for Well-Capitalized ARCs
• Management Fees Guidelines
• CRISIL Ratings

As per a statement from the RBI, the Friday gathering saw the participation of directors and chief executives from 27 ARCs, alongside senior regulatory officials, including deputy governors. The statement highlighted that over 80 participants representing all ARCs participated in the conference themed ‘Governance in ARCs – Towards Effective Resolutions’, part of a series of supervisory engagements organized by the RBI over the past year with regulated entities.

RBI noted that Deputy Governors M Rajeshwar Rao and Swaminathan J. addressed the participants, with Executive Directors S C Murmu, Saurav Sinha, J K Dash, and Rohit Jain, alongside other senior officials, also present. Rao, in his keynote address, emphasized that sound governance forms the cornerstone for ARCs to construct a resilient business model.

He stressed the crucial role of ARCs’ boards and top management in fostering a strong institutional culture based on these principles. Additionally, Rao emphasized the importance of ethical conduct in the recovery process and urged ARCs to adhere to transparent and non-discriminatory practices aligned with the comprehensive fair practice code (FPC) established by the Reserve Bank.

Meanwhile, Swaminathan emphasized the significance of setting a tone of integrity and ethical behaviour from the top. He highlighted various supervisory concerns regarding ARCs’ operations, advocating for a regulatory approach that ensures compliance with both the letter and spirit of the regulations. Swaminathan also urged boards to prioritize assurance functions, namely risk management, compliance, and internal audit.

This comprehensive approach by the RBI aims to ensure a robust and transparent environment for ARCs, potentially leading to a more stable and efficient asset reconstruction sector.