The Telegraph
Since 1st March, 1999
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No change of guard by ARCs

Mumbai, Dec. 18: The Reserve Bank of India (RBI) says asset reconstruction (ARCs) should not change, take over management, sell or lease assets of firms acquired in an effort to ferret out unpaid loans. This is part of the draft guidelines on securitisation and reconstruction companies that will come up in the aftermath of the new law that makes bad-loan recovery easier. ICICI and IFCI have laid out plans to set up ARCs.

However, the provision preventing a change in management of the borrower has been greeted by disappointment from bankers, who pointed out that this would take the sting out of the entire enforcement process.

All securitisation/reconstruction companies will require a minimum owned fund of Rs 2 crore to secure registration. They will have to formulate a plan for realisation of assets by taking measures like rescheduling payment of debts, settlement of dues and taking possession of secured assets. The planning period is the 12 months given to an ARC to find ways to redeem the impaired asset. This is treated as a standard asset as long as this process is under way.

Assets acquired for reconstruction will have to be slotted into standard and non-performing categories. Non-performing assets have been classified as sub-standard asset for 12 months, doubtful asset (it if remains sub-standard for a period exceeding 12 months) and loss asset if its non-performing for over 36 months.

On provisioning, RBI said for sub-standard assets, the ARC should make a general provision of 10 per cent of the outstanding amount. In addition, 100 per cent provision will have to be made for the amount not covered by the estimated value of security for doubtful assets; for loss assets, the whole chunk should be written off. Bankers were disappointed with this ruling too.

A write-off is considered aggressive compared with the existing guidelines for banks and financial institutions, sources said.

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