Banks’ reluctance to assume haircuts, especially when the counterparty is a private Asset Reconstruction Company (ARC) is one of the major reasons behind the subdued appetite for this route for resolution of stressed assets, according to the Reserve Bank of India’s Report on Currency and Finance.

While the amount recovered through ARCs as percentage of amount involved was significantly higher in the initial years of their inception, in recent years it dipped before increasing to 41 per cent in 2020-21, the report said.

As such, the ARC model for debt resolution has had limited success in the Indian context, the report said.

“A RBI appointed Committee on working of ARC Sector has recently examined the extant provisioning norms and the issue of loss (haircut) booked by a bank on sale of stressed assets to ARCs.

“It has recommended amortising the loss on sale of non-performing assets (NPAs) to ARCs over a period of twoyears. If the recommendation is accepted, it will incentivise the entire ecosystem.” Hari Hara Mishra, Director, UV ARC Ltd, said.

The report noted that the recently established National Asset Reconstruction Company Ltd has the potential to serve as an efficient mechanism to revive investor interest in primary markets for stressed assets and in secondary markets for security receipts.

Going forward, however, continued policy support, professional staff and transparency in operations will be essential in making the exercise cost and time effective, the RBI report said.

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