RBI calls for better governance in asset reconstruction companies

Mumbai: The Reserve Bank of India (RBI) is advocating for more active involvement from the boards of asset reconstruction companies (ARCs) for better governance, risk management and compliance.

In a meeting between ARCs and regulatory officials on Friday, the RBI pointed out that it has come across several cases of non-compliance by these companies and reiterated that regulations need to be followed, a person present in the meeting said.

The industry officials also raised a couple of issues plaguing the sector. “We raised the issue of lengthy settlement process with borrowers which make it an expensive affair, especially for retail loans,” said the attendee cited above. 

“We also highlighted how the directive to have ₹1,000 crore as net-owned funds to be a resolution applicant under the Insolvency and Bankruptcy Code, 2016 (IBC) is a challenge.”

Net owned funds are similar to net worth which is defined as the difference between what a company owns and its liabilities.

In October 2022, the central bank issued guidelines mandating ARCs to carry out a background check of borrowers by an independent advisory committee. 

The committee was to assess the financial situation of a borrower before recommending a settlement. Then, the board of directors, including at least two independent directors, would have to look into the recommendations and decide whether it is the best option available with the recovery agency.

Friday's meeting was attended by directors and chief executives of 27 asset reconstruction companies (ARCs) with senior regulatory officials including deputy governors, according to a statement issued by RBI.

The conference, the statement said, was attended by over 80 participants representing all ARCs. This event, with the theme ‘Governance in ARCs – Towards Effective Resolutions’, is a part of the series of supervisory engagements RBI has been organizing over the last one year with entities it regulates, it said.

RBI said that deputy governors M Rajeshwar Rao and Swaminathan J. addressed the participants; executive directors S C Murmu, Saurav Sinha, J K Dash, and Rohit Jain along with other senior officials were present.

Rao, in his keynote address, highlighted that sound governance provides a strong foundation for the ARCs to build a robust business model, it said.

“The onus in this regard lies largely with the boards of the ARCs and the top functionaries who will have to develop a strong and institutional culture based on these principles,” Rao was quoted as saying. 

“He also stressed on the need for responsible conduct in recovery process and emphasised that ARCs should follow transparent and non-discriminatory practices in line with the comprehensive fair practice code (FPC) put in place by the Reserve Bank,” the statement said.

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Meanwhile, Swaminathan, emphasized that setting the right tone from the top is crucial in fostering a culture of integrity and ethical conduct. According to the statement, he highlighted several supervisory concerns in the functioning of ARCs.

“He urged the ARCs to adopt a regulation plus approach where there is compliance with both the letter of the regulation and also its spirit. Boards should accord due importance to assurance functions, namely, risk management, compliance and internal audit,” it said.

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