In a bid to improve the sale of bad loans in the banking system, the Reserve Bank of India has tightened the regulatory framework for asset reconstruction companies.

The RBI said ARCs will henceforth have to mandatorily invest and hold minimum 15 per cent (against 5 per cent earlier) of the Security Receipts issued by them against the assets acquired from banks on an ongoing basis till the redemption of all the receipts.

RBI Governor Raghuram Rajan said “we have upped the requirement of skin in the game for ARCs so that it becomes costly just to participate in parking (of assets/ loans).

“It will make it more difficult for ARCs to just allow an asset to sit on their balance sheet and collect management fees for that. We are open to new players entering the ARC business, taking over new ARCs.”

In its amended regulatory framework for ARCs, the RBI crunched the planning to six months (instead of 12 months as at present) allowed for ARCs to formulate a plan for realisation of non-performing assets of the selling bank acquired for the purpose of reconstruction.

Before bidding for the stressed assets, the ARCs can ask the auctioning banks to give adequate time, not less than 2 weeks, to conduct a meaningful due diligence of the account by verifying the underlying assets.

The central bank said the ARCs should also be members of Joint Lenders’ Forum and should be a part of the process involving the JLF with reference to such stressed assets.

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