The Reserve bank of India has directed Asset Reconstruction Companies to invest 10 percent more in security receipts issued by them. Additionally the apex bank has also asked these companies to disclose the recoveries made under each asset that they acquire.
This regulation has been formulated by RBI to consolidate the sale of bad loans in the banking system. Earlier, it was compulsory to invest at least five percent of the security receipts.
"The Securitisation Company or Reconstruction Company shall, by transferring funds, invest in the security receipts of each class issued by the trust set up for the purpose of securitisation, an amount not less than 15% under each scheme and shall continue to hold the same on an ongoing basis till the redemption of all the Security Receipts issued under such schemes," the Central Bank directed in a statement.
While organizations believe the step to be a major one, they believe that it is not impossible to follow these guidelines.
"We will certainly require more resources to acquire assets from banks as now we will have to hold 15% of the receipts issued by us. This is a major change. But stronger ARCs should not find it difficult to adhere to these guidelines," Mint quoted V P Shetty, executive chairman of J M Financial ARC.
RBI has also asked ARC's to register the names of defaulters on their website and said that before bidding for the weak assets, a company can request the bank to give a minimum of two weeks to conduct auditing of underlying assets.
In case of change in planning period and valuation, the company will be given a maximum of six months to formulate a plan for realization of non-performing assets to be sold.
"The new norms would make ARCs more accountable and they will conduct additional due diligence before buying the asset. This will increase the risk for ARCs so they will be careful in purchase of assets," The Economic Times quoted Badri Narayanan, founder of Third Eye Capital Advisors.
The companies have also been directed to provide details of chartered accountants and lawyers.
"I think the idea is broadly to ensure that financial assets are dealt with in a way to ensure the maximum value for the underlying real assets and to put the economy back on track in terms of growth," RBI governor, Raghuram Rajan told reporters on Tuesday, after the announcement of monetary policy.
Earlier, RBI had directed banks to form a joint lenders forum in case of any debt worth ₹100 crore or more remains pending for more than two months.
During April-June quarter, banks had put up bad loans worth ₹30,000 crore to be sold to ARC's. In June quarter bad loans worth ₹15,000 crore was sold to ARC by banks, which include retail loans, mid-corporate loans and large corporate accounts.