RBI Issues New Guidelines for Asset Reconstruction Companies (ARCs)

The RBI has issued amended criteria for Asset Reconstruction Companies (ARCs) through a master directive, starting April 24, 2024. 

What is an Asset Reconstruction Company (ARC)?

AboutARC is a type of financial entity that buys debtors from banks at a mutually agreed-upon price and seeks to recover the debts or linked securities.
RegulationARCs are registered with the RBI.The SARFAESI Act of 2002 governs the securitization and reconstruction of financial assets, as well as the enforcement of security interests.
ObjectiveARCs acquire a share of the bank’s non-performing assets (NPAs) and engage in asset rehabilitation or securitization to recover the debts.
FunctionsAsset Reconstruction: The acquisition of bank loans or other credit facilities for realisation.Securitization refers to the acquisition of financial assets through the issuance of security receipts. 
Foreign InvestmentARCs allow 100% FDI via the automated approach.
LimitiationsARCs are restricted from lending.They can only carry out securitization and rebuilding activities. 
WorkingThe bank with NPA agrees to sell it to ARC for a mutually agreed-upon price.ARC transfers assets to trusts under the SARFAESI Act.The initial payment was made to the bank, and the remaining balance was paid by Security Receipts.Recovery funds are split between ARC and the bank. 
Security ReceiptsIssued to Qualified Institutional Buyers (QIBs) to raise financing for the acquisition of financial assets.
SignificanceBanks may improve their balance sheets and focus on core banking activities.Provides a framework for resolving non-performing assets and recovering debt. 

What are the new guidelines laid out by the RBI?

Enhanced Capital Requirements:

  • Minimum Capital Requirement rise: ARCs must now maintain a minimum capital requirement of Rs 300 crore, a major rise from the previous Rs 100 crore criterion imposed on October 11, 2022.
  • Existing ARCs are provided a transition period to meet the new Net Owned Fund (NOF) level of Rs 300 crore by March 31, 2026.
  • Interim Requirement: However, by March 31, 2024, ARCs must have a minimum capital of Rs 200 crore to meet the new requirements. 

Supervisory Actions for Non-Compliance:

  • ARCs that fail to satisfy the specified capital requirements will face regulatory action, which may include limits on conducting future operations until compliance is achieved.

Expanded Role for Well-Capitalized ARCs:

  • Empowerment of Well-Capitalized ARCs: ARCs having a minimum NOF of Rs 1000 crore can serve as resolution applicants in distressed asset situations.
  • Investment Opportunities: These ARCs are authorised to invest in government securities, scheduled commercial bank deposits, and institutions such as SIDBI and NABARD, subject to RBI guidelines. They can also invest in short-term assets including money market mutual funds, certificates of deposit, and corporate bond commercial papers.
  • Investment Cap: To reduce risk exposure, short-term investments are limited to 10% of the total NOF.

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