ARCs cannot buy bad loans where lenders can finance the purchase: RBI

MUMBAI: The RBI has banned asset reconstruction companies (ARCO) from buying bad loans through agreements where there is scope for banks or lenders to finance the purchase.

The central bank has done this by not allowing the purchase of unprofitable assets by the ARCOs through bilateral agreements in which the lender is a sponsor, a financier or a group company.

In a circular issued on Friday, RBI said ARC s will not acquire financial assets from the earlier mentioned cases whatever may be the consideration. However, ARC s can participate in the auction of financial assets by lenders provided these are conducted in a fair and transparent manner and pricing is decided by market forces. ARC s buy bad loans from lenders and make recoveries by either selling assets or getting the business back on rails.

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The central bank seems to be sending a message that lenders cannot participate Financial engineering to clean your books using your liquidity to finance a ARC , which will take over the bad loans from banks’ books.

The RBI directions come just before the fourth quarter, when banks increase the pace of bad loan sales in order to come out with good numbers at the end of the year.

Bankers say that in addition to cleaning books, selling NPA helps lenders preserve management time. Since the time for the resolution of assets under the insolvency code has exceeded two years, a lot of management time is spent attending meetings related to non-compliance. Selling the loan allows banks to move on. In addition, bankers can incorporate a clause where the ARC shares any upside from future recovery.

Earlier, banks would sell their bad loans to ARC s and fund the same by purchasing security receipts from them.