New RBI norms for ARCs makes it tougher to offload retail NPAs The new guidelines aimed at preventing ARCs from cutting deals with defaulting businesses does not distinguish between corporate and retail loans. This could make it tough for lenders to offload retail bad loans, said TOI in a report
The Reserve Bank of India recently pushed forward new regulatory guidelines for asset reconstruction companies (ARCs) and reports say that this could affect the settlement of stressed retail loans. The new guidelines aimed at preventing ARCs from cutting deals with defaulting businesses does not distinguish between corporate and retail loans. This could make it tough for lenders to offload retail bad loans, said TOI in a report.ARCs typically buy bad loans from lenders at a discount and try to make a profit by recovering a larger amount. RBI said the guidelines for the reconstruction of financial assets through the settlement of dues payable by the borrowers have been modified.
"Settlement of dues with the borrower shall be done only after the proposal is examined by an Independent Advisory Committee (IAC) which shall consist of professionals having technical/ finance/ legal background," it said.
IAC, after assessing the borrower's financial position, the time frame available for recovery of the dues, projected earnings and cash flows of the borrower and other relevant aspects, shall give its recommendations to the ARC regarding the settlement of dues with the borrower.
Norms require that settlement with the borrower should be done only after all possible steps to recover the dues have been taken and there are no further prospects of recovering the debt. In cases where the lender holds a security, the settlement amount should not be less than the value of the security.
The norms laid out by RBI appear to be aimed at settlement of large corporate loans but has not made exceptions for retail and small loans, R K Bansal, MD, Edelweiss Asset Reconstruction Company, told TOI. Edelweiss ARC has been purchasing retail bad loans, including home and education loans, from lenders for over three years and recovering through various means including settlement.
In case of unsecured loans, settlement would be the only meaningful option. “Most of the retail loans recovery is through settlement, thanks to credit bureaus, Aadhaar and availability of mobile numbers recovery through counselling has improved,” he said. Under the new norms, ARCs would not find it practical to settle loans.
Earlier, the central bank had set up a committee to undertake a comprehensive review of the working of ARCs and recommend suitable measures for enabling them to function in a more transparent and efficient manner.
The regulatory framework for ARCs has been amended based on the committee's recommendations and feedback from stakeholders, the RBI said.
This story originally appeared on: India Times - Author:Tax Cognition
