A spurt in the activities of asset reconstruction companies (ARCs) driven by banks’ efforts to clean up their balance sheets calls for a closer look at the extant arrangements between ARCs and banks, the RBI said.

In 2013-14 (FY14), banks sold non-performing assets (NPAs) aggregating about ₹18,000 crore ( around ₹10,000 crore in FY13) to ARCs.

The RBI noted that as most of the securitisation activity is taking place predominantly with the issuance of security receipts (SRs) rather than cash, there is a concern that banks may tend to use this option to evergreen their balance sheets.

SRs may not carry the stigma of NPAs (their value mainly being derived from the collateral and not based on the record of recovery), although the risk of loss of income on the asset still remains, in effect, with the originator (the bank). The central bank said under the current framework, the ‘real’ incremental value addition of ARCs in the process of ‘reconstruction’ of assets, over banks’ traditional skills and informational advantage (stemming from their credit appraisal, monitoring and recovery processes) also needs to be assessed.

Further, as the banking industry has a significant stake in the ownership of most of the ARCs currently functioning in India, the spread of risks may not be taking place effectively.

Apart from the focus on asset reconstruction, effectiveness of various measures to improve the asset quality of banks will also depend on the efficient functioning of the corporate debt restructuring (CDR) mechanism and debt recovery tribunals (DRTs).

“There is a need to monitor the efficacy of the processes at ‘entry’, ‘restructuring’ and ‘exit’ stages of restructuring proposals, under a robust framework of accountability of different agencies and stakeholders involved,” the RBI said in its Financial Stability Report.

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