Some ARCs Are Bypassing Norms, Says RBI Deputy Governor

Mumbai: The Reserve Bank of India (RBI) Deputy Governor, Swaminathan J on Wednesday said that the central bank’s onsite examinations have revealed that some asset reconstruction companies are circumventing regulations and have allowed themselves to be used for the evergreening of distressed assets.

“During the course of our onsite examinations, we have come across instances where ARCs have been used or allowed themselves to be used, if I may say so, as a conduit to evergreen distressed assets. In many cases, there is a lack of transparency and consistency in the issuance and periodical valuation of a Security Receipts (SRs). The practices surrounding levy of management fee leaves much to be desired,” said Swaminathan at a conference of Asset Reconstruction Companies (ARCs) held in Mumbai.

Evergreening is the practice of granting further credit to firms close to defaulting to help them repay existing loans. The deputy governor said that it has also been observed that a few entities found new ways of achieving their designs once a particular practice has been called out as a violation or deviation. The regulator has directed such entities to arrange for remediation including setting aside capital charge on gains thereon. ARC boards should give due importance to assurance functions, such as risk management, compliance and internal audit, Swaminathan said, noting that such functions play a critical role in identifying and mitigating risks, ensuring compliance and safeguarding the organisation's reputation.