The Hindu Business Line : RBI proposes stiff prudential norms for setting up ARCs

THE Reserve Bank of India today said an asset reconstruction company (ARC) would have to maintain a minimum capital adequacy ratio of not less than 15 per cent of its total risk-weighted financial assets on an on-going basis.

The risk weight for all assets except Government securities, both State and central, and cash and bank balances, will be 100, the central bank has suggested.

In draft guidelines for setting up and operating asset reconstruction companies (ARCs) made public today, the RBI has proposed stiff prudential norms and various checks and balances such as clearly laid out policies and internal control systems to be monitored by sub-committees of the board of directors.

A banker closely associated with the setting up of ARCs, however, said that the capital adequacy norm is a bit unclear in that it does not apply if the reconstruction activity is done in such a manner that assets are not held in the books of the ARC.

The RBI has proposed an organisation structure similar to mutual funds. According to the operational structure envisaged, an ARC would set up one or more trusts, which would issue security receipts to "Qualified Institutional Buyers." The trusteeship will be with the board of directors of the ARC. The company will have to declare net asset values of the security receipts under each scheme every quarter.

The draft norms said ARCs would have to chalk out a restructuring plan for each asset, clearly spelling out how and in what time the asset will be recast and value realised, within one year of acquiring it. During the planning period, the assets purchased for reconstruction will be treated as standard assets.

The acquisition of assets, to be supervised by an `Asset Acquisition Committee' of independent directors, shall be in conformity with the principles of "true sale" whereby the risks and rewards associated with the assets stand transferred to the buyer. However, the ARC itself will not be allowed to buy any secured assets put on sale, the RBI said.

The guidelines also do not permit ARCs to sell or lease whole or part of the borrower's business. The RBI's opinion is understood to be that the ARC can use the right only if there is a prior contractual security interest in favour of the secured creditor on the business of the borrower.

The central bank has also proposed stiff provisioning norms.

For sub-standard assets, ARCs will have to make a general provision of 10 per cent of the un-repaid loan amount. For doubtful assets the provision has to be 100 per cent to the extent the loan is not covered by the estimated realisable value of security. In addition they will have to make a provision of 50 per cent on the remaining amount. Loss assets have to be written off. If the asset remains in the books for any reason, 100 per cent of the amount has to be provided for.

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