RBI issues master direction for asset reconstruction companies, to be effective from April 24

The Reserve Bank of India (RBI) has issued Master Direction to the Asset Reconstruction Companies. An Asset Reconstruction Company (ARC) is a financial institution that buys the Non Performing Assests (NPA) or bad assets from banks and financial institutions so that the latter can clean up their balance sheets.

"ARCs play a critical role in the resolution of stressed financial assets of banks and financial institutions, thereby enhancing the overall health of the financial system. To ensure prudent and efficient functioning of ARCs and to protect the interest of investors, Reserve Bank of India hereby issues the Master Direction - Reserve Bank of India (Asset Reconstruction companies) Directions, 2024" said a realese by the RBI.

According to the directions, to commence the business of securitisation or asset reconstruction, an ARC is required to have a minimum net owned fund (NOF) of Rs300 crore and thereafter, on an ongoing basis.Additionally, before commencing the business of securitisation or asset reconstruction, an ARC shall apply for registration and obtain a certificate of registration (CoR) from the RBIThe directions also state that no ARC shall invest in land or building, except for investment for its own use up to 10% of its owned funds.

Furthermore, ARCs are prohibited from raising money by way of deposit. They are also mandated to maintain a capital adequacy ratio of a minimum of 15% of its total risk-weighted assets.Regarding leadership positions, the directions specify that no person shall continue as MD/ CEO or Whole-time Director (WTD) beyond the age of 70 years.

Additionally, the tenure of MD/ CEO or WTD shall not exceed five years at a time, with a maximum tenure of fifteen years continuously.Moreover, ARCs are required to report to the Indian Banks Association (IBA) the details of chartered accountants, advocates, and valuers who have committed serious irregularities in the course of rendering their professional services for inclusion in the IBA database of third-party entities involved in fraud.

These directions aim to streamline and regulate the functioning of Asset Reconstruction Companies in India, ensuring transparency, accountability, and integrity in the financial system.

In the Union Budget 2021-22, Finance Minister Nirmala Sitharaman announced the setting up of Asset Reconstruction Companies in India to take care of Non-Performing Assets (NPAs) of stressed banks. ARCs in India has been set up by state-owned and private-sector banks.

Also, there is no equity contribution from the government. ARCs help banks clean up their balance sheets by acquiring financial assets from banks and financial institutions through auctions or bilateral negotiations. They securitize and reconstruct the assets to bring liquidity into the system.