ARCs seek parity with banks for settlement of small value loans

Asset Reconstruction Companies (ARCs) are seeking parity with banks when it comes to settlement of small value loans.

They want the Reserve Bank of India to consider a liberalised settlement scheme for resolution of small value loans in the wake of the Finance Ministry reportedly asking public sector banks (PSBs) to devise schemes for settlement of loans up to ₹50 lakh with the help of systems, including Artificial Intelligence (AI).

PSBs are drawing up system-driven schemes which will be non-discretionary, not subject to human intervention and strictly adhere to the principle of value maximisation.

Since ARCs derive their rights from the banks assigning the loans to them under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002, it is important that they too have flexibility like banks in settlement of borrowers’ dues at least in the case of small value loans, said the chief of an ARC.

This will also help the Debts Recovery Tribunals, where there are lakhs of cases awaiting adjudication and recovery of debts, focus on high value cases. Delay in settlement results in value erosion of the pledged collateral.

Hence, ARCs want both the central bank and the Ministry to work out suitable guidelines for increased use of settlement process and also for ease of doing business. This will help sort out problems specifically of small and medium enterprises and small retail borrowers.

The current regulatory prescription for settlement of loans is proving onerous for ARCs as it requires them to get each settlement proposal, irrespective of the loan amount, scrutinised by an independent advisory committee followed by an approval from ARCs’ board.

“According to an Asian Development Bank study report, settlement is most time effective (1-1.5 years) and numerically most successful resolution strategy (63 per cent). 

“Any rationalisation of the settlement process will have positive outcome on timeliness and yield of resolution outcome “ Hari Hara Mishra, CEO, ARC Association.

According to the RBI’s ‘Committee to Review the Working of ARCs’, these companies allow banks/ financial institutions to focus on their core function of lending by removing the sticky stressed assets from their books and thereby freeing up capital and management for productive use. Where lenders invest in security receipts (SRs), ARCs make recovery for lenders by acting as the manager of the stressed assets.

Revival of business

ARCs can help the borrowers in reviving their businesses. Revival of businesses is a significant need both for protecting the viable and productive assets of the economy and for ensuring better return to lenders from their stressed assets.

Currently, there are 28 ARCs in India. The book value of assets acquired by them stood at ₹5,65,683 crore as at March-end 2022, per RBI data.

As of March-end 2022, security receipts (SRs) issued by ARCs stood at ₹1,22,130 crore. Amount of SRs completely redeemed and outstanding were at ₹23,396 crore and ₹69,219 crore, respectively.

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