ARCs or their recovery agents should not harass borrowers says RBI Dy Governor Rao

Speaking at the conference on “Governance in ARCs-Towards effective resolutions” held this month, the speech which was uploaded on the central bank’s site on Friday, Rao said that promoters in an Indian market are large shareholders who can influence company policy and, according to regulatory definitions, are prospective owners or directors of the company.

“There is a regulatory framework in place, under the provisions of SARFAESI Act, which enables ARCs to undertake resolution. However, there are concerns around activities in this process chiefly relating to the ARC route becoming a vehicle for entry of the ‘tainted’ promoters, who in the first place were responsible for the default of the underlying entity.”

“This aspect has become particularly relevant since the introduction of Section 29A in the Insolvency and Bankruptcy Code (IBC), which was specifically meant to keep out such promoters. However, often, entities meet this requirement by merely obtaining a declaration signed by the perspective buyer without undertaking any independent verification,” he said.

Rao said that ARCs also need to be conscious of their conduct vis-à-vis the distressed borrowers as even a single incident of misconduct could potentially snowball into a controversy. He said that while the central bank acknowledges the rights of the ARCs to recover overdue loans, they or their recovery agents should not resort to harassment of borrowers. “A comprehensive fair practice code (FPC) for ARCs has been put in place which requires ARCs to follow transparent and non-discriminatory practices. This becomes that much more critical at present juncture when the share of retail loans in the financial assets acquired by the ARCs has increased (from 9 per cent, as of March 31, 2020 to 16 per cent as of March 31, 2023),” Rao said.

This week, the central bank announced supervisory actions against two Edelweiss Group companies saying they engaged in evergreening of distressed loans - the practice of granting further loans to firms close to default to help them repay existing loans.

Rao also noted that not all ARCs have implemented the revised guidelines on composition and functioning of the Board and failure to meet these regulations and wilful violations “would invite strictsupervisory and enforcement action, if warranted.”